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Part I General Aspects, 2 European Banking Union: Effectiveness, Impact, and Future Challenges

Kern Alexander

From: European Banking Union (2nd Edition)

Edited By: Danny Busch, Guido Ferrarini

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2021. All Rights Reserved.date: 09 May 2021

Bank resolution and insolvency — Bank supervision — Eurozone — Monetary union — European Banking Authority (EBA)

(p. 27) European Banking Union

Effectiveness, Impact, and Future Challenges

I.  Introduction

2.01  The European Banking Union was designed to restore the financial health and stability of the European banking system and to sever the link between weak banking systems and fragile sovereign debt finances. The Banking Union consists of three pillars: the Single Supervisory Mechanism (SSM), Single Resolution (p. 28) Mechanism (SRM), and the European Deposit Insurance System (EDIS). The SSM was implemented first, taking effect in 2014 to enhance supervision of the European banking sector and to promote banking stability following the financial crisis of 2007–2009 and the euro area sovereign debt crisis of 2010–2012. The SSM provides the supervisory pillar of the European Banking Union and empowers the European Central Bank to carry out prudential supervision of credit institutions and certain financial holding companies that are established in participating Member States and to allocate supervisory responsibilities to the national competent authorities of participating Member States for less significant institutions. The other two pillars of the Banking Union consist of the Single Resolution Mechanism (SRM) and the European Deposit Insurance System (EDIS). The SRM took effect in 2016 and operates through the Single Resolution Board, which has authority to take a bank or systemically important investment firm into resolution and to utilize resolution tools to restructure or recapitalize the institution if necessary to prevent a crisis and to avoid a taxpayer funded bailout. The SRB can draw on a Single Resolution Fund, which can be tapped to help wind down a systemically important institution.1 The third pillar, known as EDIS, represents a common scheme to insure bank deposits across the Banking Union, but is still under negotiation as it faces strong political opposition in Germany and other countries.2

2.02  Political factors played a great role in the SSM’s creation in June 2012 because of the economic threat to the single currency attributed to the Eurozone sovereign debt crisis and the Spanish banking crisis of May 2012.3 The centralization of supervisory powers in the European Central Bank was considered to be a necessary condition for the creation of an ‘effective single supervisory mechanism’ for banks in the Eurozone that could serve as a pre-condition for the recapitalization of individual banks through the European Stability Mechanism.4 The Commission’s (p. 29) proposals for the institutional structure of the SSM were made on 12 September 20125 and were followed by two more Regulations (1024/2013 and 1022/2013) that were adopted in October 2013.6 The SSM regulatory framework became fully operational on 4 November 2014 after the ECB completed a comprehensive assessment of the balance sheets of the Eurozone’s systemically important banks in 2014.7 The European Commission’s proposal on the Single Resolution Mechanism—the second pillar of the Banking Union—was made on 10 July 20138 and, after subsequent amendments, was formally adopted on 15 July 2014 and took effect on 1 January 2016. The final pillar of the institutional landscape of the Banking Union—centralization of deposit guarantee schemes—has been supported by the Five President’s Report of 2015 that called for renewed efforts to build a common deposit scheme.9

2.03  This chapter provides an assessment of the effectiveness and impact of the Banking Union on banking supervision and resolution, and its overall impact on the Eurozone banking sector five years after becoming operational in November 2014. Part I provides a general overview of the SSM framework and how it was designed to promote supervisory harmonization and convergence in the Banking Union. It considers some of the challenges for the SSM in achieving its objectives of harmonized supervisory practices to promote stability and integration in the internal market. Part II discusses how the SSM has interacted with other EU institutions and agencies, particularly its relationship with the European Banking Authority. Part III analyses the development of the Single Resolution Mechanism (p. 30) and the effectiveness of the relationship between the SSM and the SRM’s Single Resolution Board. Part IV discusses the impact of the SSM on Member States and national competent authorities and some of the institutional and legal challenges to improving the effectiveness of the SSM-NCA relationship. Part V considers the effect of the SSM on the Eurozone banking sector and how it has impacted banking performance, organizational structures and related business practices.

2.04  The chapter concludes the Banking Union has achieved a considerable degree of effectiveness in banking supervision by engaging effectively with other EU authorities, such as the European Banking Authority, in adopting regulatory and technical standards and guidelines that have enhanced the SSM’s supervisory practices. The chapter also considers how the SSM has co-ordinated with the other operational pillar of the Banking Union—the Single Resolution Mechanism—and will review how it has co-ordinated with the SRB in making determinations of the financial viability of institutions and when necessary supporting the SRB in taking institutions into resolution. Nevertheless, considerable challenges remain regarding further development of the Banking Union and whether the recently enacted Capital Requirements Directive V legislative package adequately expanded the ECB’s competence to supervise systemically important investment firms and to ensure that banks are managing the governance risks associated with financial crime, terrorist financing and related areas of market misconduct.10

II.  Single Supervisory Mechanism—Setting the Context

2.05  The SSM represents the first legally binding transnational system for banking supervision. The SSM institutional framework ties together the bank supervisory authorities of the nineteen Euro Area states to promote a more harmonized application and enforcement of EU bank prudential regulatory law. A growing literature in economics, policy science and law has analysed the viability and effectiveness of transnational bank supervisory arrangements.11 Generally, stricter (p. 31) supervisory standards that are jointly co-ordinated between states can improve banking sector stability and overall performance. Acharya et al have argued that risk spillovers from banks in weakly supervised jurisdictions into other strictly supervised jurisdictions leads to regulatory forbearance in the strictly supervised jurisdictions.12 Joint harmonization of supervision and regulation across jurisdictions however inhibits this race to the bottom.13 Agarwal et al empirically find that a centralized supervisor with responsibility over multiple jurisdictions can be stricter in applying and enforcing regulatory law than local supervisors.14 By analysing US banks, they show that, compared to state authorities, the federal supervisory agencies have adopted stricter prudential standards and are more proactive in enforcing them.15

2.06  This growing literature supports the idea that a transnational financial supervisor can be effective in achieving its objectives if it is supported by an adequate institutional and legal framework.16 In the case of European Banking Union, it has been recognized that a fundamental rearrangement of the bank prudential regulatory, supervisory, and resolution frameworks has been achieved, with the exception of a deposit guarantee scheme, resulting in the creation of a ‘financial safety net’ in the Euro Area.17 The effectiveness of the SSM—and indeed the overall Banking Union—could be measured in part by the level of financial integration in the Euro Area and in particular to what extent ‘prudential legal obstacles and impediments’ still obstruct ‘the establishment of a single supervisory jurisdiction’ and whether or not home bias, financial fragmentation, and retrenchment largely along national lines, which can result in uneven and asymmetric funding and (p. 32) risk sharing across the banking and financial sector, have been reversed.18 Other commentators emphasize the power of EU legal and institutional factors to shape the development of banking markets while influencing the organizational structure and strategy of banking groups.19 And others have analysed the effectiveness of the SSM in terms of whether the right balance has been struck in determining whether the ECB should have more influence over prudential rule-making.20

2.07  The SSM’s establishment has resulted in a historic shift of legal supervisory competences from Member States to an EU institution. Under the SSM, the European Central Bank (ECB) has been empowered to exercise direct prudential supervision with respect to ‘significant’ credit institutions, banking groups and certain mixed financial conglomerates that are based in Eurozone states.21 For example, the ECB’s supervisory powers include the granting and withdrawal of banking licences, assessing the suitability of bank directors and senior management, and approving mergers and acquisitions.22 Although the ECB has the competence and responsibility for prudential supervision of these institutions regardless of size or systemic significance, the SSM Regulation authorizes the ECB to allocate direct supervisory tasks for ‘less significant’ banks and financial groups to the relevant national competent authority.23 However, the ECB can always ‘call up’ direct supervision for such other Eurozone banks when necessary to ensure consistent application of high supervisory standards. The SSM system therefore consists of both the ECB and the NCAs operating within a decentralised framework of supervision in which the ECB is exclusively competent in a legal sense and responsible for ensuring the effective discharge of the supervisory tasks enumerated in Article 4 of the SSM Regulation.24

(p. 33) 2.08  The SSM’s overriding objectives are to ensure safety and soundness of the European banking system and to ensure the unity and integrity of the EU internal market.25 To achieve these objectives, the ECB/SSM and Member State competent authorities apply the European Single Rulebook,26 which consists of EU prudential bank legislation and regulatory and technical implementing standards and guidelines adopted by the European Banking Authority.27

2.09  All euro area Member States are automatically SSM members, while non-euro area members can decide to participate in the SSM through a procedure involving the national competent authority entering into a ‘close co-operation’ with the ECB.28 For the other non-participating Member States, the ECB is authorized to adopt a Memorandum of Understanding with the relevant national competent authority that explains how the ECB will co-operate with the competent authority in performing their respective supervisory tasks.29

2.10  As discussed in part V, five years after the creation of the SSM, a view has developed amongst some regulators and market participants that the SSM has proven itself to be an effective supervisory network that has functioned smoothly and has (p. 34) supported the stability and resilience of the European banking system.30 For instance, the German Federal Financial Supervisory Authority (the ‘BaFin’) has observed that ‘[i]t now plays an important role in safeguarding long-term financial stability and advancing financial market integration’.31 Another view, however, asserts that the SSM has limited the flexibility that national competent authorities previously had to address risks in local banking markets and has increased the operational costs for NCAs to ensure that they comply with the SSM regime, and furthermore increased compliance costs for banks, thereby hindering their capacity to support the Eurozone economy.

1.  Supervisory Convergence and Harmonization

2.11  The SSM Regulation sets forth the ECB’s supervisory tasks in Article 4(1)32 that the ECB shall have the powers to supervise credit institutions and banking groups by applying and enforcing the relevant provisions of EU banking law, such as the Capital Requirements Directive IV and the Capital Requirements Regulation33 as well as national law implementing related areas of EU banking law.34 The subject matter or areas of competence for the ECB are enumerated in Article 4 of the SSM Regulation35 that empowers the ECB to monitor capital adequacy, liquidity buffers and leverage limits, bank corporate governance (including remuneration and board appointments), approve bank mergers and acquisitions, recovery plans and asset transfers between affiliates within banking groups or mixed financial conglomerates.36

2.12  The SSM has created a regulatory and legal framework that has made it possible to harmonize supervisory practices through the creation of the EU single rulebook, which has supported a more unified bank regulatory policy on an EU-wide basis, and has significantly enhanced the stability of the banking sector.37 Despite the goal of a more unified banking market based on harmonized prudential supervisory (p. 35) standards, it has been argued that European banking regulation and supervision is far from integrated and harmonized.38 Some of the barriers to a more integrated and harmonized supervisory framework include cultural differences, such as language and local customs, but also civil and commercial law differences. For instance, the financial industry operates largely on the basis of legal contracts that are essentially governed by Member State law. Financial products such as loans, deposits or mortgage-backed securities are contracts, which terms and conditions depend on local legislation and judicial decisions. Moreover, differences in corporate and personal insolvency laws, and collateral enforcement regimes, are considered a primary barrier to the creation of pan-European bank business models and financial products.39 In addition, harmonized supervisory practices under the SSM have been hindered by the unfinished business of creating a Eurozone Banking Union and an EU-wide Capital Market Union (CMU). Essentially, the group of countries that constitute the Banking Union have harmonized some bank rules, but many areas remain fragmented including tax, bankruptcy law and rules on treatment of collateral.40 For example, the lack of a common Eurozone deposit insurance scheme has hindered the integration of the cross-border retail banking business.

2.13  EU legislation to promote a CMU across the twenty eight EU states attempts to address similar challenges that include, among others, the heavy reliance of EU-based firms on bank finance, significantly different financing terms for firms across EU states, inadequate access to capital markets for many small and medium-sized firms, segmented national markets for shareholders and buyers of corporate debt, and differing rules and market practices between EU states for products like securitized instruments and private placements.41

2.14  The CMU’s objectives include establishing a genuine single capital market in the EU where investors are able to invest their funds without hindrance across borders, and businesses can raise capital from a diverse range of sources, irrespective of their location.42 It aims to develop a more diversified financial (p. 36) system complementing bank financing with deeper and more developed capital markets that facilitate the cross-border flow of capital to its most productive use.

2.15  Similarly, revisions to EU insolvency law that make it easier for companies to restructure their debts and operations and EU legislation to adopt a common consolidated corporate tax base will improve incentives for firms to increase their cross-border operations in Europe and to raise more capital from investors in other EU states.43 These legislative initiatives are intended to reverse the fragmentation of European banking and capital markets that has occurred post-crisis by eliminating or reducing some of the main institutional and legal barriers that have hindered savers, investors and businesses from having greater investment choices and lower funding costs. This is particularly relevant to cross-border banking in Europe because pan-European combinations of banking groups across the Eurozone and EU states can only make sense if institutions can move capital and liquidity more freely across the bloc—something that is hindered due to different regulatory standards, private law frameworks, capital financing practices, and taxation.

2.  Governance of the SSM

2.16  The SSM provides the ECB with supervisory powers to be exercised through a Supervisory Board (‘SB’).44 The SB is responsible for supervising the euro area’s largest cross-border banks and the top three banks by size in each participating Member State. The SB is also responsible for the supervisory actions of national competent authorities responsible for supervising over 3,500 small and medium sized credit institutions in participating Member States.45 The SB has ultimate discretionary authority to decide whether to intervene and to take supervisory decisions that could supersede the decisions of national competent authorities with respect to less significant credit institutions which the SSM does not directly supervise.

(p. 37) 2.17  Moreover, Article 25 of the SSM Regulation requires a separation between SB and its prudential supervision function and monetary policy to address the moral hazard concern that central bankers might use monetary policy to increase the supply of credit to weak banks during times of market distress.46 However, the so-called ‘Chinese wall’ separating the monetary policy and prudential supervision functions has raised important questions about whether the pursuit of monetary and financial stability should be linked and co-ordinated or strictly separated.47

2.18  Aspects of the SSM governance structure have been criticized and improvements have been recommended by some national competent authority regulators certain areas.48 In particular the German Federal Ministry of Finance has called for more safeguards to mitigate the potential conflict of interest between monetary policy and banking supervision. This should involve organizational changes that allow the SB more autonomy and to be subject to less detailed oversight from the Governing Council in making day-to-day supervisory decisions. However, it is recognized that any change that would diminish the Council’s final decision-making authority over supervisory decisions would require amendment of the EU Treaty. In lieu of Treaty change, it is recommended that the Mediation Panel that mediates disputes between the Council and Board plays a more proactive role in facilitating a more efficient allocation of functions between the Council and the SB.

2.19  The potential for disputes between the Council and the SB raises an important concern regarding the SSM’s governance. Good governance involves clear lines of accountability between those who take decisions and those who are subject to the decisions and also requires a certain amount of transparency in how decision-making is conducted and whether it is perceived as legitimate by those subject to the decisions. If governance of a regulatory body is not administered properly—for example, because decision-making procedures are unnecessarily cumbersome and complex or because decision-makers do not have the incentives to act in the interest of those who are affected by their decisions and do not explain (p. 38) adequately the rationale of their decisions—then it is more likely that regulators and supervisors will not perform their functions effectively. Addressing governance concerns in EU institutions inevitably raises the issue of how EU Member States are affected by the decisions of EU institutions and what role they can play to influence decision-making.

2.20  As mentioned above, the governance structure of the SSM reflects several considerations, in particular the objective of separating the ECB’s prudential supervisory role from its primary monetary policy role of maintaining price stability and the value of the euro. The primacy of the ECB’s price stability mandate in Article 127(1)49 of the Treaty explains why the Governing Council is empowered to make all final ECB decisions, including approval by action or non-action of SB decisions. This has implications for the potential role of SSM-participating non-Euro Member States in ECB decision-making. Although non-euro Member States which participate in the SSM would be able to participate in the governance of the SB, such as in the day-to-day preparation of SB decisions, they would not have representatives on the Governing Council and therefore would not be able to vote on final decisions, particularly those that involve approving (or not) SB decisions that could directly affect banks operating in their local jurisdictions. This concern is not only theoretical: two non-Euro area member states – Bulgaria and Croatia - have applied for close cooperation with the SSM with their banks undergoing ECB comprehensive assessments of their balance sheets in 2019 with a view to joining the SSM in the near future. Over time, as more EU states apply for close cooperation with the SSM, governance concerns could arise potentially weakening its legitimacy and effectiveness, as non-euro Member States that participate in the SSM would not have any direct representation on the ECB Governing Council to influence final decisions relating to banking supervision. In fact, the only formal remedy that would be available to a participating non-euro state that objects to a Governing Council decision is to refuse to adhere to the decision and to withdraw from the SSM.

2.21  In addition, it has been noted that the objective of increased harmonization of supervisory practices should not lose sight of the fact that effective banking supervision requires a supportive institutional structure in which the Governing Council and SB can delegate day-to-day supervisory tasks to joint supervisory teams with discretion to issue directives or to order institutions to take certain measures to comply with prudential requirements.50 The role of JSTs and how they have evolved into the main players in SSM supervision will be discussed in Part IV.

(p. 39) 3.  SSM and International Bodies

2.22  Since assuming its bank supervision responsibilities, the ECB has taken on full member status in international financial standard setting bodies, most significantly on the Financial Stability Board and the Basel Committee on Banking Supervision (BCBS).51 This involves the ECB directly in the development of international financial standards for banking supervision, such as the FSB’s Key Attributes for Effective Resolution Regimes of Systemically Important Financial Institutions and the Basel Committee’s Capital Accord and the Core Principles for Banking Supervision. In contrast, the European Banking Authority only has observer status in these international bodies. In co-operation with the EBA, the ECB contributes to co-ordination of the positions among EU/SSM members of the Basel Committee and FSB with regard to key developments and reforms currently deliberated by these bodies. The ECB’s membership of the FSB and the Basel Committee provides it with the opportunity to influence directly international bank standard setting while offering the perspectives of Banking Union Member States as well as all EU members states in co-ordination with the EBA.

2.23  The ECB’s membership in the Basel Committee contributes indirectly to the development of EU bank regulatory law because the Commission practice has been to propose most parts of the Basel Accord and its amendments into EU law. The ECB played an important role in the Basel Committee’s deliberations in 2016–2017 over the adoption of amendments to Basel III (so-called ‘Basel IV’), which were agreed in December 2017. Basel IV tightens the prudential regime in several ways, including stricter credit valuation adjustment standards between wholesale counterparty institutions, increased leverage ratios for systemically important institutions, and most controversially limitations on the use of bank internal risk models to lower the riskiness of assets in order to reduce capital requirements.52

2.24  Basel Committee members, including the ECB, are required to implement these amendments by 2022. Before then, the European Commission will need to conduct an impact assessment for implementing these amendments, before proposing legislation to transpose them into EU law. The ECB will have to balance this initiative with its involvement in other EU banking regulation reforms, such as the 2016 CRD V legislation, the 2017 draft Regulation for reducing prudential requirements for investment firms, and the Commission’s Action Plan for sustainable finance and regulation, which would include sustainability measures in prudential risk assessments. As a member of the Basel Committee, the ECB should play a facilitative role in working with the Commission to ensure that (p. 40) these various initiatives are implemented in a complementary way into supervisory practice.

4.  CRD Reform Package (CRD V)

2.25  The European Parliament and Council adopted the Capital Requirements Directive V reform package entitled ‘Amending Capital Requirements’ (also known as CRD V) into law in 2019.53 The CRD V amends the Capital Requirements Regulation (CRR) and Capital requirements Directive IV (CRD IV) by making certain regulatory adjustments to implement most of the Basel III requirements into EU law and by making bank prudential regulation more proportional in achieving regulatory objectives.54 In doing so, the legislation adjusts the pillar 1 capital calculation standards for standardized approach lending to small and medium-sized institutions; adopts a harmonized binding net stable funding ratio (NSFR)55 rules in relation to repurchase agreements (repos) and reverse repos;56 more risk sensitive capital requirements for market risk (trading books);57 large exposures prudential treatment (eg exposure to a single client); streamlines the Pillar 2 capital requirements to interact more effectively with Pillar 1) and allows supervisors to require the additional ‘add-on’ capital for pillar 2 to be Tier 2, rather than Tier 1, capital.58

2.26  Other aims in the legislation include reducing unnecessary compliance costs by reducing the scope of reporting and disclosure requirements for non-complex banks and adjusting the remuneration restrictions in CRD IV so that a certain percentage of variable pay can be made in ordinary shares or other share-linked financial instruments of the company and can be deferred over a period of years (p. 41) to meet the variable remuneration requirements.59 The CRD V package also addresses bank lending to small and medium-sized enterprises and infrastructure projects.60 Under the current EU capital regime, banks now receive a capital charge reduction of 23.81% for SME lending under €1.5 million. In the proposed legislation, the ‘SME supporting factor’ is maintained, but would be extended to all SME loans over €1.5 million. For the loans above the €1.5 million limit, a 15% reduction for the remaining part of the exposure would apply.61

2.27  The CRD V would create less stringent capital and liquidity requirements for trading book risks of banks and investment firms that have relatively low trading book risk exposures. It would divide these institutions into two categories: (1) institutions with a smaller trading book of €50 million or less and the value of their trading book is less than 5% of the institution’s total assets; and (2) medium sized institutions with less than €300 million in trading book assets that are less than 10% of the institution’s total assets. These institutions will qualify for waivers from certain capital and liquidity requirements for trading book risk.62

2.28  Moreover, there will be exemption regimes from stricter capital, liquidity and governance requirements for public development banks and credit unions.63 The proposal includes additional exemptions for institutions that are organizationally and functionally similar to these institutions.64 Despite the focus on more flexible and proportionate application of regulatory rules, CRD V failed to provide for the possibility of cross-border banking groups obtaining waivers from certain prudential requirements at individual subsidiary level, which would have permitted them to qualify for reduced capital and liquidity requirements in their cross-border EU subsidiaries, thereby allowing them to manage their capital and liquidity centrally and thereby gain the benefits of a common internal market.

2.29  A shortcoming of the CRD V package could be that it does not adequately address the risks posed by ‘shadow banks’—financial firms which engage in maturity transformation (borrow short and lend long) and which potentially pose financial stability risks, but which are not subject to the CRD IV capital, liquidity and governance requirements because they are not defined as ‘credit institutions’, as that term is defined under the Capital Requirements Regulation. Also, the CRD V package does not propose that the ECB and NCAs have competence to supervise non-bank finance companies in the shadow banking sector and entities involved in financial market infrastructure, such as clearing houses/central counter parties, and central securities depositories. However, CRD V package observes (p. 42) that ‘[c]urrently, the Parliament proposed that, when carrying out the SREP, competent authorities shall monitor institutions’ exposures towards shadow banking and financial transactions potentially leading to tax benefits, and notify the Commission.’65

2.30  The CRD V package is likely to make a great deal of further regulatory adjustment necessary including renewed reform of capital and liquidity requirements under the Basel Accord 2017 reforms that allow banks to rely less on internal ratings-based models by limiting the reduction in risk-based assets to not less than 70% of the standardized approach and stricter counter-party margining requirements. These proposals, among others, are contained in the draft CRR III and will apply the proportionality principle further to take into account the specificities of Member State markets as well as the European market.

III.  SSM and EU Agencies and Institutions

1.  European Banking Authority

2.31  The European Banking Authority (EBA) was created as one of the three European Supervisory Authorities based on the recommendations of the EU High Level Group on Financial Supervision, chaired by former IMF Managing Director and French central banker Jacques De Laroisere, which submitted its Report on 25 February 2009 proposing the creation of a European System of Financial Supervision (ESFS).66 Reflecting the views in the De Larosiere Report, the Commission proposed the ESFS67 to consist of a European Banking Authority, a European Securities and Markets Authority, and a European Insurance and Occupational Pension Authority.68 The three ESAs would, with support from a (p. 43) European Systemic Risk Board,69 promote more effective micro-prudential and macroprudential regulation and supervision of European financial markets and a more efficient functioning of the EU internal market.70 The ESAs’ responsibilities include developing single rulebooks consisting of regulatory implementing standards and technical implementing standards and guidelines for Member States to apply in their respective financial sectors.

2.32  The EBA’s main specific tasks and responsibilities are set forth in article 8 of the EBA Regulation to contribute to the ‘establishment of high quality common regulatory and supervisory standards and practices’.71 The EBA has competence to contribute to the ‘consistent application of legally binding EU acts’,72 as well as to monitor and assess market developments in the areas of its competence, and to co-ordinate and co-operate with the ESRB and other the ESAs in conducting EU-wide assessments of financial institutions’ resilience to adverse market conditions (ie stress tests).73

A.  EBA and SSM Interaction

2.33  The Single Supervisory Mechanism Regulation and the Regulation (EU) 1022/2013 amending the EBA Regulation both aim to incorporate the SSM into the ESFS with regard to tasks conferred on it by the SSM Regulation.74 Article 3 of the SSM Regulation requires the ECB to co-operate closely with EU bodies and national authorities, particularly the three European Supervisory Authorities: the European Banking Authority (EBA), the European Supervisory and Markets Authority (ESMA), the European Insurance and Occupational Pension Authority (EIOPA), and the European Systemic Risk Board and other ESFS authorities (p. 44) to ensure an adequate level of regulation and supervision.75 This would involve co-operation with the competent or supervisory authorities, as specified in the EU legal acts referred to in Article 1, paragraph 2 of the EBA Regulation.76 Significantly, specific co-operation principles have been laid down for the ECB in Article 3 of the SSM Regulation on the basis of considerations in Recital 31 as follows:

The conferral of supervisory tasks on the ECB should be consistent with the framework of the ESFS and its underlying objective to develop the single rulebook and enhance convergence of supervisory practices across the whole Union. Cooperation between banking supervisors and the supervisors of insurance and securities markets is important to deal with the issues of joint interest and to ensure proper supervision of credit institutions operating also in the insurance and securities sectors.

2.34  Recital 31 further reinforces the principle of co-operation with the ESFS by requiring the ECB ‘to co-operate closely with EBA, ESMA and EIOPA and the European Systemic Risk Board, and the other authorities which form part of the ESFS.’ And the ECB should also ‘carry out its tasks’ in accordance with the SSM Regulation and ‘without prejudice to the competence and the tasks of the other participants within the ESFS’, and in co-operation with the relevant resolution authorities and facilities that provide direct or indirect public financial assistance to the financial sectors.

2.35  Despite the strong language requiring ECB co-operation with the ESFS, there have been difficulties and tensions in the EBA-ECB relationship.77 The position is set forth in the SSM Regulation that states that the EBA is ‘entrusted with the development of the Single Rulebook for the banking sector’, and also states that the SSM ‘should not replace the exercise of those tasks by the EBA’.78 Moreover, Article 16 of the EBA Regulation provides that the SSM ‘has to follow the Guidelines and Recommendations developed by the EBA, or explain why it chooses not to follow them’.79

2.36  Yet whilst the functions of the EBA and ECB appear to be differentiated in the SSM Regulation, the actual discharge of their respective regulatory and supervisory tasks has not been so straightforward. For instance, unlike national competent authorities, the ECB’s supervisory rulebook applies to all credit institutions based in the 19 euro area states. The ECB’s much broader competence to supervise directly all systemically important credit institutions across the euro area and to co-ordinate the supervisory activities of the participating Member States places its relationship with the EBA in a quite different context than the relationship of a (p. 45) Member State competent authority with the EBA. Therefore, whenever the ECB exercises its supervisory competence by adopting guidelines and rules, this clearly affects and potentially overlaps with the EBA’s delegated competence under EU legislation to adopt guidelines and technical standards for Member States to implement. This overlap in supervisory competence has been recognized in the situation where an ECB supervisory initiative predates the final adoption of a technical standard or regulatory decision taken by the EBA.80

2.37  The SSM SB has implemented a process by which it can report its compliance with EBA Guidelines and Recommendations involving the direct supervision of significant institutions. However, the SB has stated that its compliance with EBA guidelines and recommendations is based on a comply or explain basis. In its 2017 review of the SSM, the European Commission observed that this compliance approach does not create more transparency for ‘end-users’ such as credit institutions, as there is uncertainty regarding the hierarchy of legal and regulatory norms that apply to their cross-border business models.81 For instance, the ECB may use directly applicable Regulations or other binding domestic legal instruments that implement Directives to specify regulatory rules, even if that means departing from applicable EBA Guidelines and Recommendations.82 However, the Commission has noted that the ECB has demonstrated that it aims to comply with all the Guidelines that fall within its area of competence. Nevertheless, different views have been taken by the ECB and EBA regarding how to comply with the specific provisions of EBA guidelines. These different views could potentially undermine the development of harmonised supervisory practices between ‘in’ and ‘out’ Member States.

B.  EBA-ECB/SSM Governance

2.38  Regarding the governance dimension of EBA and ECB/SSM interaction, the Commission has proposed closer co-operation,83 including that the EBA should participate more often in SSM SB meetings, as this would promote further supervisory convergence. Moreover, the EBA Regulation grants the SSM observer status in the EBA Board of Supervisors (BoS),84 while allowing the BoS members representing the SSM countries to retain their independent membership status. This may appear unusual because the ECB is ultimately the competent supervisory authority responsible for ensuring that these same SSM member countries are complying with EU banking law, including EBA technical standards and guidelines. The Commission has attempted to promote more coherence in EBA/SSM (p. 46) decision-making by proposing, at a minimum, that the ECB should have an equal voice with other SSM countries within the EBA Board of Supervisors.85

2.39  The EBA has observed that the creation of the SSM has significantly changed its governance and decision-making processes. To ensure equivalent influence between ‘in’ Member States and ‘out’ Member States, the EBA regulation was amended to require double simple majority voting for the adoption of all technical standards and guidelines.86 At a more general level, the European Commission has observed that ‘the creation of the SSM has implied for the EBA a loss of visibility of supervisory processes that were previously conducted in supervisory colleges and are now internalised in the decision making of the SSM and the Single Resolution Board’.87 The Commission raised the concern that these institutional arrangements might generate an ‘artificial disconnect’ between the EBA’s regulatory and the SSM’s supervisory functions, which could be addressed by providing meaningful and systematic participation of the EBA in the SSM and SRB.88

2.40  It is suggested that the ECB/SSM should participate more in EBA activities, including a more active role in developing binding technical standards, guidelines and recommendations. Although the EBA appreciates the ECB/SSM involvement in certain areas of standard setting and deliberations, it points out that the ECB’s involvement is not equally forthcoming across most areas of EBA activity. Sometimes, the ECB plays an important role in leading regulatory and supervisory discussions; on other occasions, it is less active. The Commission has stated that it would be ‘welcome if the ECB would ensure responsiveness and pro-active participation consistently, especially where the EBA calls for intervention’.89 The SSM already participates in EBA technical groups and expresses views on the BoS and Management Board.90 Building on this, a recent ECB paper91 recommends greater ECB/SSM involvement in the EBA with the ECB granted (p. 47) voting rights both as a member of the EBA BoS and as a permanent member of the Management Board.92

2.41  The implications of Brexit are also discussed in the context of voting reforms in the EBA and the other European Supervisory Authorities (ESAs).93 The Commission’s 2017 consultation on the ESAs and ESRB includes a response that post-Brexit voting shares in the EBA/ESAs should be calculated based on the size of a Member State’s financial sector.94 Also, Banking Union countries suggested the elimination of double-majority voting, while Member States outside the Banking Union argue that double-voting should be maintained.95 The Commission proposed a draft Regulation96 in 2017 that the voting arrangements in the EBA should be amended to include voting status of the SSM and SRB on the EBA supervisory board in order to help bridge the current institutional divide between regulatory, supervisory, and resolution functions. The Commission also proposed to keep the double majority voting system for measures and decisions adopted by the EBA Board of Supervisors,97 but that voting rules should be modified to ensure that votes would not have to be postponed if a quorum on the BoS is not met. The draft Regulation amendment therefore clarifies that a decision would need to be supported by a simple majority of NCAs from non-participating Member States present at the vote and of national competent authorities from participating Member States present at the vote.98

(p. 48) 2.42  The EBA is also responsible for administering the EU-wide stress tests and the development of a complete methodology, whereas national competent authorities (including the ECB) are responsible for the quality of the data and operation of the stress test. Co-ordination between EBA and national supervisors (including the ECB) is required, but often lacking. Although it does not have direct control over the quality assurance process of the stress tests, the EBA is held accountable to EU policymakers for the EU-wide stress tests. It is recommended therefore that close co-operation between the EBA and ECB is necessary to ensure the quality and accountability of the stress tests.99

2.43  Related to the EU-wide stress tests, the EBA is also responsible for designing technical standards and guidelines for the supervisory review and evaluation process (SREP) that assesses bank corporate and risk governance under the Capital Requirements Directive 2013. An important component of the SREP involves the EBA developing and refining forward-looking scenario stress tests that Member State competent authorities (including the ECB) are required to apply. The application of the SREP methodology may result in additional capital requirements, and the adjustment of bank business models and strategy. The Commission’s consultation, however, recommends that the EBA could further refine the SREP Guidelines and scenario testing for business models and strategies in order to promote enhanced supervisory convergence across EU states. Also, the EBA encourages the ECB to co-ordinate the development of its own SREP methodology to avoid legal uncertainty and divergent supervisory practices across EU states.100

2.  The SSM and ESMA, EIOPA, and ESRB

2.44  Another gap in the ECB’s relationship with EU institutions and bodies is the lack of meaningful participation with other European Supervisory Authorities (ESMA & EIOPA) in the mutual exchange of information for supervisory practices and other regulatory information. The ECB has entered into mutual agreements and memorandum of understanding (MOUs) on information exchange with ESMA and EIOPA. The ECB-ESMA MOU covers statistics, risk management, supervision of market infrastructure and regulation. A similar MOU with EIOPA is being updated. The Joint Committee of the three Supervisory Authorities, however, has utilized MOUs between the EBA, ESMA, and EIOPA to develop and adopt jointly agreed technical standards, guidelines and recommendations, but these MOUs do not include the ECB/SSM. It is submitted that this hinders the SSM’s capacity to fulfil its supervisory tasks, especially on a consolidated basis for mixed (p. 49) financial conglomerates, as information obtained through mutual assistance is crucial for carrying out prudential supervisory tasks on a cross-sectoral basis.

2.45  Moreover, the ECB’s institutional representation in its supervisory capacity in the European Systemic Risk Board’s (ESRB) General Board is not yet recognized, as the ESRB was established prior to the creation of the Banking Union and the ECB being empowered to engage in prudential supervision of individual financial institutions, but without competence for broader macroprudential oversight of the financial system. Under the SSM, however, the Commission has observed that co-operation between the ECB and the ESRB in regards to micro- and macroprudential tasks is important, and that such co-ordination—facilitated by information exchange that arises from the ECB’s obligation to provide a Secretariat and research support for the ESRB—has taken place and should improve over time.101 This co-operation and co-ordination between the ECB and the European Supervisory Agencies and the European Systemic Risk Board has had the effect of allowing the ECB to take advantage of these institutional channels to monitor risks and obtain more information on European financial markets thereby enhancing its effectiveness as a bank supervisor.

3.  European Court of Auditors

2.46  The European Court of Auditors has the responsibility of performing audits of all EU institutions and agencies, including the ECB/SSM. Some Member State authorities have observed that the SSM framework should ensure that the supervision of significant institutions remain subject to a full and complete public auditing process. Presently, in most Member States, the supervision of banks is also subject to a public auditing process. For instance, the German BaFin’s supervision of non-significant financial institutions is subject to an audit by the Bundesrechnungshof, while the ECB’s supervision of significant financial institutions are subject to a public auditing by the European Court of Auditors. The German BaFin has recommended that ‘to further improve the European Court of Auditors public auditing practices, a co-operation agreement should be concluded between the Court and the ECB’.102

2.47  The ECA also issued an audit report on the SSM in 2016103 that makes recommendations in the following areas: governance, accountability, off-site and on-site visits.104 Moreover, it was noted that the ECA had difficulties in its performing its audits of the SSM because the ECB in some cases did not share the (p. 50) required information. This has been brought to the attention of the European Parliament and Council. Both encourage more co-operation between the Court and ECB. The ECB has responded by stating that it is willing to discuss these matters with the ECA.105

2.48  EU banking regulation and supervision demonstrates the complexity of the EU federal system of laws and jurisdictions that contain layers of administrative rulemaking that overlap. The use of EU state agencies to implement Union law has long been a feature of the EU, but Union authorities and agencies have grown in influence and legal importance.106 Since the introduction of Banking Union, not only EU supervisory authorities—the ESFS: EBA, ESMA, and EIOPA—but, also, EU institutions came to be involved on a day-to-day basis with executing supervision and making decisions on whether banks should be taken into resolution. The Commission, in the area of resolution together with the Single Resolution Board, and the ECB are the major players in the oversight of the banking industry. For the ECB, its role is defined as both a direct supervisory function and an oversight role for the NCA within the SSM. As discussed in section IV, this state of affairs leads to issues of competence and, in the case of the ECB’s own powers, to the peculiar situation of a European institution applying national law.

IV.  Bank Resolution, the SSM, and the Single Resolution Board (SRB)

2.49  Bank resolution laws have been deemed vital for maintaining the stability of the financial system, especially during times of crisis. An effective banking supervisory regime requires a seamless process in which supervisory assessments of individual institutions can be co-ordinated with the monitoring of risks across the financial system and with decisions to take crisis management measures, including the use of resolution tools to stabilize individual institutions that pose a threat to financial stability. Goodhart has observed that regulators and resolution authorities should ask ‘themselves how to protect the system of banks, conditional on another bank, perhaps one of the biggest and most inter-connected, having already failed’.107

(p. 51) 2.50  Prior to the crisis, most EU states did not have resolution regimes for banks and other systemically important firms. The European Union’s Bank Recovery and Resolution Directive (BRRD)108 became effective on 1 January 2016 and provides a minimum harmonization regime that requires, among other things, the 28 Member States to change their domestic laws so that resolution authorities have use of four resolution tools that are enumerated in Article 37(3), namely, the sale of the business tool, the bridge institution tool, the asset separation tool and the bail-in tool. Resolution authorities may execute the resolution tools individually or in any combination.109 The design of the BRRD bail-in tool requires covered institutions to issue minimum required eligible liabilities (MREL) as loss-absorbent capital.110

2.51  Also, the Financial Stability Board’s ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ emphasize the clear identification of a resolution authority with a broad range of powers, including a comprehensive and common toolkit of supervisory and resolution measures, and a credible funding source so that taxpayers are not called upon to bail out a bank or to subsidize its restructuring. European states have adopted national resolution laws to meet BRRD requirements and FSB standards as follows. The Italian special administrative regime suspends many of the powers of the shareholders’ general meeting, but the Banca d’Italia appoints special administrators to convene shareholder general meetings and establish a resolution agenda.111 Similarly, the German supervisory authority (Bafin) may suspend current management and appoint a temporary administrator to manage a failing bank.112 Under French law, the Banking Commission can appoint a temporary administrator with powers to manage and act on behalf of the bank.113 The Belgian Banking, Finance and Insurance Commission (BFIC), now replaced by the Financial Services and Markets Authority (FSMA) since 2011, can appoint a special inspector with (p. 52) enhanced administration powers. Swiss law also provides the regulator with extensive powers to appoint a special administrator to govern the bank’s affairs.114 Moreover, the Swiss regulator can likewise impose a forced reorganization with changes to the capital structure that are not subject to shareholder approval.115 Norwegian law provides for a public administration regime that allows for a compulsory reorganization and override of the shareholders. The Norwegian supervisor may stipulate that the share capital shall be increased by a new subscription for shares and designate eligible investors to subscribe for the shares, thus diluting existing shareholders.116 Similarly, the French Banking Commission may request the courts to order the transfer of shares to another entity.117

1.  Single Resolution Mechanism

2.52  The Single Resolution Mechanism (SRM) implements the BRRD in the Banking Union (BU) and has been operating since January 2016 through the Single Resolution Board.118 The SRM serves as the second pillar of the BU that would complement the supervisory powers of the ECB in the Single Supervisory Mechanism (SSM). The Commission’s proposal to create the SRM was based on the rationale that an effective regulatory regime required a seamless process between the supervision and resolution of banking institutions in order to limit the damage to the economy and reduce taxpayer exposure to bailouts.119 The SRM aims to create a more uniform and harmonized resolution process and substantive rules across the BU that can more effectively place banks and certain investment firms experiencing solvency problems into resolution with minimal costs to taxpayers.120 The SRM applies the substantive rules of the BRRD to banks that are supervised by the ECB/SSM, but also has more extensive jurisdiction over systemically important investment firms. Unlike the SSM, the SRM’s Single (p. 53) Resolution Board (SRB) has direct oversight of resolution matters for over 6,000 credit institutions and investment firms based in the euro area, regardless of their size and cross-border operations.121 Whereas the ECB is responsible for direct supervision of the largest and systemically important banking institutions—about 130 banking groups—while NCAs exercise delegated supervision for about 3,500 banking groups in the BU.

2.53  Given that the SRM Regulation was agreed in 2014 and became effective in 2016, the SRB is not explicitly mentioned in the SSM Regulation that was agreed in 2013 and took effect in 2014, but the SSM Regulation contains a general reference to the role of a resolution authority. An important difference arises between the ECB’s scope of direct supervision and the remit of national resolution authorities falling under the competence of the SRB. Compared to the SSM, the SRB has wider jurisdiction, covering credit institutions, and non-bank financial institutions and large systemically important non-bank financial institutions not directly supervised by the ECB. These institutional and jurisdictional overlaps and gaps reflect a certain lack of symmetry in the design of the supervisory and resolution frameworks of the BU, as the ECB only has direct authority to make determinations of whether a bank should be taken into resolution under the SRM regime for about 130 banking groups and only indirect authority acting through the relevant NCAs to make such a determination for the other 3,500 small and medium sized credit institutions. In contrast, the SRB must consult with the relevant NCAs—either central banks, standalone bank supervisors, or securities regulators—in order to trigger the resolutions of covered investment firms and certain financial groups not subject to SSM supervision.

2.54  The BRRD and SRM regulations provide a badly needed resolution regime for the EU and BU, respectively, which did not previously exist, and can only supplement and enhance the EU regulatory and supervisory framework for banking institutions, particularly in the BU where the ECB has taken on important new supervisory functions. For instance, banks and covered investment firms are required to hold higher amounts of loss absorbent capital and to issue a minimum amount of bonds and certain other unsecured debt instruments that are subject to mandatory write-downs (ie bail-in) if the bank or banking group’s capital levels fall sharply.122 The ECB is responsible for overseeing and approving bank recovery plans123 whilst resolution authorities are required to write resolution plans (also known as ‘living wills’) to plan for how the bank would deal with disorderly markets and even its own failure in the event that it became unviable.124 The (p. 54) stricter requirements that banks issue debt capital that can bail-in bondholders and other creditors along with the requirements for recovery and resolution planning means that the resolution framework not only intends to reduce taxpayer exposure to a bank bailout, but also serves the regulatory objective of reducing excessive risk-taking by banks and covered investment firms.125

2.55  The effectiveness of the SSM’s interaction with the SRM was tested in 2017 in the case involving the Spanish bank Banco Popular. In this case, the SSM’s Supervisory Board (SB) made a determination that Banco Popular had lost access to the wholesale funding markets and would soon collapse without adequate funding. After the Governing Council approved the SB determination that Banco Popular was likely to fail, the SRB decided to put the institution into resolution after approval from the Spanish authorities, the Commission and Council. The SRB then conducted a valuation of Banco Popular’s assets and liabilities and decided to transfer the bank’s viable assets to Santander and to use the bail-in tool to recapitalize the bank and impose losses on most of the bank’s bondholders. Although the SRB’s valuation of the bank’s assets and liabilities has attracted some criticism and led to several lawsuits in Spanish and European courts, the restructuring of Banco Popular can be considered to be a successful exercise in co-ordination between the ECB/SSM and the SRB that demonstrates the effectiveness of the SSM-SRM framework and how it can be used effectively to restructure an ailing institution without causing a systemic crisis. The Banco Popular case also demonstrates the necessary sequence of events that should occur when a bank is determined to be unsound and should be taken into resolution: that is, (1) the ECB identifies when a bank is in serious financial difficulties and should be resolved; (2) the SRB—consisting of representatives from the Commission, the ECB, and national authorities of Member States where the bank operates—makes a recommendation on resolution to the Commission; (3) the Commission decides whether to approve the Board’s recommendation for resolution and approve a resolution plan and refers its decision to Council for final review; and (4) national resolution authorities would implement the approved resolution plan under the supervision of the SRB.

2.56  The SRM Regulation also establishes a Single Resolution Fund (SRF) that is under the control of the SRB.126 The SRF is funded by contributions from all the banks in the participating Member States of the SRM.127 The Inter-Governmental (p. 55) Agreement (IGA) provides for the transfer of national funds towards the SRF with the Fund reaching a target level of 1% of covered deposits (around € 55 billion) in January 2024 after an eight year transition period that began on 1 January 2016.128 During the transition period, the SRF consists of ‘national compartments’ corresponding to each participating Member State’s resolution authority and fund. The IGA further provides for the activation of the mutualization of risk between the national compartments during the eight year transition period.129 The national compartments are in operation and will become gradually mutualized and will cease to exist at the end of 2023. At the end of the transition period, the Regulation requires a common backstop fund to be established and operational by 1 January 2024.130 The common backstop will facilitate borrowing by the SRF and will ultimately be reimbursed by contributions from the banking sector. Before the back-stop becomes operational, European policymakers are considering additional proposals to the SRF’s financing structuring and have agreed ‘terms of reference’ on how to give the SRF access to emergency loans from the European Stability Mechanism, which presently is responsible for sovereign bailouts.

2.  SRB and Meroni

2.57  A more difficult issue, however, arises regarding the scope and extent of the SRB’s discretionary powers to take a bank into resolution, which could undermine the effectiveness of the ECB’s role in making determinations of an institution’s unviability. The Court of Justice of the European (CJEU) has adopted narrow limits to the powers that can be delegated to EU agencies. In the often-cited 1958 Meroni case, the CJEU held that delegation of powers to EU agencies can only relate to clearly defined executive powers, ‘the use of which must be entirely subject to the (p. 56) supervision of the [Commission].’131 The CJEU elaborated further on the Meroni doctrine when it upheld the EU short-selling regulation on the basis of article 114 TFEU that allows EU legislation to delegate to EU agencies powers to adopt implementing measures (non-policy measures) to improve the conditions for the establishment and functioning of the internal market.132 In the short-selling case, the EU short-selling regulation delegated powers to the European Securities and Markets Authority to make determinations of market conditions that allow it to prohibit the short-selling of bank stocks during periods of market distress. It should be emphasized, however, that the CJEU has interpreted the Meroni doctrine as holding that the EU legislator cannot delegate discretionary powers of a policymaking nature from the Commission to an EU agency, as this would upset the EU institutional balance established by the Treaty.133

2.58  As the SRB is an EU agency, its scope of powers to take discretionary decisions is limited by Meroni case law. The Commission has explained that this is why ultimate decision-making authority regarding whether to take a bank into resolution rests with the Commission and Council. Nonetheless, without a firm legal basis, a resolution decision recommended by the SRB to the Commission could be challenged in the courts. This has occurred in the case involving the shareholders and bondholders of the Spanish bank Banco Popular, which was taken into resolution by the SRB in May 2017, and has triggered a wave of lawsuits in Spanish and European courts regarding the issue of whether the SRB has acted ultra vires.

2.59  In addition, the SRM’s operations are limited by Member States’ fiscal sovereignty, that is, the right not to be compelled by the Commission and Council in approving a SRB recommendation that a bank should be restructured with temporary public financial support from the national resolution authority’s public fund if the Single Resolution Fund has inadequate funds. This means that supra-national EU resolution powers end where the Single Resolution Fund proves to be (p. 57) inadequate. The Meroni doctrine and Member State fiscal sovereignty may therefore continue to prove to be obstacles to the effective operation of the SRM.134

3.  SRB’s Broad Powers and Legal Uncertainty

2.60  The SRM allows the SRB and Member State resolution authorities substantial discretion in deciding whether or not to put a failing bank into resolution, if the prospect of putting the bank into resolution might, in the view of the resolution authority, cause significant adverse consequences to the economy or financial instability.135 This type of financial crisis exemption can serve valid regulatory objectives by allowing regulators flexibility in responding to the unique circumstances of a crisis or severe economic dislocation. The SRM however provides no discernible criteria for determining whether a bank resolution is likely to cause severe adverse consequences, financial instability or a systemic crisis. The lack of agreement between resolution authorities and policymakers about what might cause financial instability or a systemic crisis may result in unjustified regulatory forbearance. Influential investor groups and financial institutions, facing potentially substantial losses in a bank resolution, may pressure politicians and regulators during a crisis to forbear in the use of resolution tools and to use taxpayer money instead to bail out a bank. Moreover, the SRB’s task is especially difficult because the definition of a systemic financial threat or systemic crisis is much debated and there is no agreed upon definition by economists nor under EU law.136

2.61  In addition, the regulation permits, under exceptional circumstances, the SRB to exclude or partially exclude certain bank investors (ie bondholders) from mandatory write-downs or debt-to-equity conversions on their investments.137 Exceptional circumstances are not defined in the regulation and can be subjectively assessed by the SRB in its broad discretion. This occurred in the Banco Popular case and has led to may lawsuits by the bondholders who were bailed-in. (p. 58) It is submitted that the discretions and exceptions to the application of resolution powers and tools in the regulation undermine legal certainty and the predictability of the Single Resolution Mechanism for market participants, and that this undermines the effectiveness of the SSM.

4.  SSM Co-ordination with SRB

2.62  As discussed above, the ECB/SSM has established other channels of close co-operation with the SRB. The SSM and SRB agreed a MOU that allows for the exchange of information necessary for the SRB to prepare and take resolution actions.138 However, there appears to be some overlap between the early intervention powers in the bank recovery and resolution directive (BRRD)139 and similar early intervention powers listed in the SSM Regulation, each backed by different procedures. The ECB can opt for the BRRD early intervention powers that are transposed into national legislation, or can choose the same or equivalent powers set forth in the SSM Regulation. The ECB may decide to circumvent the more complex domestic legal and procedural requirements attached to the use of early intervention powers under the BRRD, and instead rely on the more familiar early intervention powers of the SSM Regulation.

2.63  The institutional and legal complexities of co-ordinating early intervention powers between bank supervisors and resolution authorities are discussed in a White Paper published in 2017 by the Banco Central do Portugal that analyses some of the main legal and regulatory issues involved in the allocation of powers between central banks, supervisory authorities and resolution authorities in the Banking Union. The report critically analyses the institutional gaps and legal uncertainties that limit the effectiveness of the SRM in part due to the limited role of the SSM in the resolution process. The report also analyses pre-SRM EU law on bank resolutions in the context of the Banco de Portugal case that involved the application of bail-in powers against bondholders of Banco de Portugal, a bank taken into resolution under Portugese law prior to implementation of the bail-in rules under the BRRD.140

2.64  Further complexities regarding early intervention powers and supervisory powers arise in the context of the SRB’s (and other Member State authorities) powers to require banks and covered financial groups and conglomerates to change their organizational structure if the SRB determines that the bank or banking group’s organizational structure is a substantial impediment to a feasible and credible (p. 59) resolution of the bank or group.141 If the SRB, acting in consultation with national resolution authorities, determines that there are substantial impediments to the implementation of the resolution plan, it may order the institution to remove the impediments, including changing its organizational structure or business activities.142 Indeed, this could involve changes to the legal, operational and financial structure of institutions or the group itself and their business activities.143 In ordering the removal of such organizational impediments, the SRM Regulation sets out procedural and substantive rules about how the institution or group can be required to reduce or remove these impediments.

2.65  To this end, the SRM Regulation requires the SRB to draw up resolution plans after consultation with the national competent authorities (including the European Central Bank) and national resolution authorities, including the group resolution authority. Article 10(11) of the SRM Regulation requires the SRB, when drafting and revising the resolution plan, to identify any material impediments to resolvability and, based on the EU legal principles of necessity and proportionality, to instruct the relevant national resolution authority to take the necessary measures to address those impediments.144 The SRB can also require the relevant national resolution authority to take specific measures to require the institution to remove the impediments, if the institution subject to resolution powers can potentially draw on funds from the Single Resolution Fund.145

2.66  The SRB and the relevant national resolution authority are required to notify the firm in writing of any substantial impediments they have identified, and the firm or group will have the opportunity to address these concerns and propose measures to eliminate these impediments. The SRM Regulation provides that if the firm’s or group’s proposals are considered inadequate, the resolution authority will have the power to take specific actions that address or remove the impediments to resolvability.146 In selecting the appropriate measure to remove the impediments, the ECB has worked with resolution authorities to choose a measure based on the (p. 60) nature of the impediment. These measures can be classified in three categories—structural, financial and information-related or data management. The use of these measures involve a large degree of technical analysis of bank balance sheets and corporate group structures, but nevertheless also involve a substantial amount of discretionary decision-making based on criteria that fall within a large range and are not prioritized in any meaningful way. These assessments of the nature of organizational impediments to effective resolution planning has necessarily involved the ECB in close co-operation with the SRB and Member State resolution authorities regarding the extent of organizational impediments and how they should be addressed in the context of resolution and recovery planning.

V.  SSM, Macroprudential Tools, and National Competent Authorities

2.67  This section analyses the SSM’s interaction with national competent authorities and the views of NCAs regarding the SSM’s effectiveness in achieving its regulatory objectives. The ECB is responsible for the effective and consistent functioning of the SSM and for ensuring that national competent authorities (NCAs) are fulfilling their supervisory responsibilities for less significant institutions as set forth under Articles 4, 5, and 6 of the SSM Regulation.147 This section analyses how the ECB carries out its prudential supervisory tasks in co-ordination with participating NCAs and considers some of the views of NCAs and Member State Authorities regarding how the SSM is operating and whether or not it is achieving its objectives.

2.68  The ECB Supervisory Board is responsible for overseeing the supervisory actions of participating NCAs that supervise directly less significant institutions in the SSM regime.148 The SB has ultimate authority to decide what directives on complying with prudential requirements to issue to institutions directly supervised by the ECB and to NCAs regarding institutions not directly supervised by the ECB. For instance, the ECB has discretion to intervene—either on its own initiative or if it is requested to intervene by the NCA—and take direct oversight of less significant institutions that are ordinarily subject to direct supervisory control by NCAs if the ECB determines that it is necessary to meet its objectives under the SSM Regulation or to ensure that the relevant NCA is fulfilling its supervisory responsibilities.149

(p. 61) 2.69  Some Member States, however, have expressed concerns about the concentration of powers in SB governance and decision-making. For example, the BaFin has expressed a concern about SB decision-making and the allocation of competences between the SB and ECB Governing Council in which SB decisions can only have external effect on institutions with approval of the Governing Council. As the SB decides on common procedures for approximately 3,500 institutions in the SSM, it is not efficient to have all SB decisions regarding the adoption of common procedures approved by the Governing Council. This leads to an unnecessary administrative workload for the Governing Council if it has to deal with so many supervisory issues when the SB can be relied upon to take such decision.

2.70  Another Member State concern has been that too much supervisory decision-making regarding an institution’s day-to-day operations has been centralized in the SB, rather than vested with NCAs. Rather, the SB should be focusing its decision-making on more fundamental areas including monitoring institutions’ compliance with supervisory rules, approving governance strategies, including bank board appointments, and investigations and enforcement. Instead, there is a growing number of issues that the SB is expected to address in the day-to-day operations of an institution that involves a complex process of co-ordination with the relevant NCAs, the ECB’s direct supervisory teams, and ECB senior management including all members of the SB.

2.71  Furthermore, regarding small, regional and non-complex institutions, the German BaFin has emphasized the importance of supervisory practice and regulatory rules aiming to achieve a balance between harmonization and proportionality.150 For example, less strict reporting requirements should apply for medium and smaller institutions, especially those that are not systemically important. The principle of proportionality should also be applied in other supervisory processes, such as the review of bank risk governance under the Supervisory Review and Evaluation Process (SREP) and the design of stress tests and assessment of compliance with hypothetical stress testing scenarios.151

1.  The SSM, NCAs, Supervisory Colleges, and Joint Supervisory Teams

2.72  The ECB is responsible for direct supervision of ‘significant’ credit institutions, which represent over 80% of banking assets in the euro area.152 The ECB is also indirectly responsible for the supervision by national competent authorities of (p. 62) smaller, less systemically important institutions.153 When the SSM went into effect in November 2014,154 several significant institutions objected to being subject to direct ECB supervision. One of these banks, Landeskreditbank Baden-Württemberg—Förderbank, requested a review of the decision determining it to be significant and petitioned for judicial review with the EU General Court after the SSM Administrative Board of Review (ABoR), established as an independent body of first review, rejected its request to be classified as a less significant institution.155 The General Court interpreted the language of article 4 (1) of the SSM Regulation to entrust the ECB exclusively with the tasks listed in that article (all microprudential supervision) for all credit institutions in the Euro Area.156 The court further observed in paragraph 72 of the judgment that ‘under the SSM national authorities are acting within the scope of decentralized implementation of an exclusive competence of the Union, not the exercise of national competence.’ Commentators have observed that the practical effect of the judgment is that for a request to be classified as less significant, the applicant needs to prove that direct ECB supervision would be less likely than national supervision to achieve the SSM Regulation’s overall objective of consistent application of high prudential standards;157 and that a significant entity cannot escape direct ECB supervision by showing that national supervision was just as effective as the ECB in achieving the SSM Regulation’s objectives.158 Moreover, L-Bank’s argument that the ECB’s (p. 63) classification of it as a significant institution lacked proportionality and violated the subsidiarity principle under EU Treaty law was rejected by the Court in light of the exclusive competence transferred to the ECB to supervise credit institutions against the subordinate role attributed to the NCAs under the Regulation.159

2.73  On appeal, the Court of Justice of the European Union (CJEU) upheld the General Court’s ruling that all prudential competences covered by Article 127(6) of the TFEU have been allocated exclusively to the ECB, with NCAs acting by delegation when executing their own powers, such powers having previously been exercised by NCAs prior to adoption of the SSM Regulation.160 The effect of the L-Bank case on a bank’s right to challenge a SB decision taken pursuant to its powers in Articles 4–6 will be discussed in more detail in section IV.

A.  Supervisory Colleges and Joint Supervisory Teams

2.74  Article 6(7)(b) of the SSM requires that the ECB and national competent authorities (NCAs) establish a public framework for making practical arrangements between the ECB and the NCAs to co-ordinate oversight of ‘credit institutions’ not considered as less significant.161 Under EU banking law, the home country supervisor of a credit institution or financial conglomerate that has activities and operations in host Member States is required to form a supervisory college for that particular institution. The formation of supervisory colleges is facilitated by the European Banking Authority, but within the euro area where the ECB takes the lead in supervising significant institutions in participating Member States, the ECB plays the main role in forming supervisory colleges for credit institutions it directly supervises, whilst the NCAs of participating Member States in which the parent companies of financial conglomerates, subsidiary credit institutions and significant branches are established will participate in the college as observers.162 Also, as required by Article 9(2) of the SSM Framework Regulation, the ECB and host Member State competent authorities in non-participating Member States have established colleges of supervisors where significant entities (under direct supervision of the ECB) have significant branches in those non-participating Member States.163

(p. 64) 2.75  The rules governing the participation status of Member States as either a ‘member’ or an ‘observer’ in a college is set forth in Article 10 of the SSM Framework Regulation. Where the consolidating supervisor is not in a participating Member State, the following rules will apply. For a significant supervised entity, the consolidating supervisor chairs the college and the ECB is a member, while host NCAs are observers. For less significant entities, all national competent authorities where they operate are members of the college. If the supervised entities in a participating Member State are both less significant and significant entities, the ECB and NCAs are members. The country in which the significant supervised entity is established will be an observer in the college of supervisors.164

2.76  As mentioned above, the EBA has facilitated the creation of the supervisory colleges which report primarily to the EBA. The SSM, however, has built on the college structure to create joint supervisory teams (JSTs) for ECB supervised credit institutions. The JSTs consists of supervisory representatives of many of the colleges and more technical experts in specialized areas of supervision. Participating Member States have noted the challenges in overseeing and directing the work of the JSTs. For instance, the German BaFin165 has noted some of the challenges for JSTs as geographical distance, language barriers, multi-dimensional reporting lines, different supervisory cultures. These obstacles have undermined effective communication and transparency of decision-making with the teams.

2.77  The JSTs have achieved much progress in enhancing the rigour of supervision in such a short period of time since the creation of SSM, including enhanced collaboration between work areas and establishing a minimum level of trust between JST members from different NCAs. Nevertheless, a BaFin paper notes the challenges that remain regarding ‘integration of very different supervisory cultures, languages and banking system under one roof remains a challenge, as does the readjustment in important areas like governance and the SREP’.166 For example, NCAs have expressed some concerns including the double unco-ordinated reporting lines, such as NCA staff are required to report to NCA and JSTs.167 Also, there are concerns regarding language in relation to supervised institutions. For many less significant institutions, internal documents are not written in English, and this poses a challenge to JSTs whose members usually have diverse nationalities and who communicate in English. Moreover, JSTs sometimes suffer from insufficient staff allocations to address complex tasks.

(p. 65) 2.78  To address these weaknesses, the President of the Banque de France and a few NCAs have expressed the view that the SB should work with NCAs to develop common review processes.168 For instance, the common supervisory review and evaluation process (SREP) for significant institutions (SIs) is resource-intensive, but it is an important part of enhancing the quality of supervisory review and will improve the standard of supervision. Although it is important that the ECB oversees the implementation of SREP methodologies, it is submitted that NCAs should have more input in the design of the SREP process and in creating a more transparent methodology for supervisory review and addressing other process-related issues.

2.79  Also, the BaFin observes that the SSM should approve a more rigorous methodology for supervisory review for less significant institutions.169 In response, the SB has approved a key project to introduce SREP for less-significant institutions (LSIs) in collaboration with the EBA. The responsibility for developing SREP methodologies for LSIs should remain with NCAs and should not be contradicted by SSM provisions which are unnecessarily granular and intrusive onto the NCA’s pillar 2 supervisory discretion.170

2.  Regulating Home-Host Responsibilities

2.80  The SSM rules apply to existing home-host supervisory arrangements, but where the ECB has taken over prudential supervisory tasks under Article 4 of the SSM Regulation, it carries out the functions of both the home and host authorities of participating Member States.171 Moreover, the ECB acts as a host supervisor in relation to significant branches operating in participating Member States which have home offices in non-euro area countries and for other branches considered as significant institutions which have home offices in third countries outside the EU/EEA.172 This means where a branch is established in a host SSM country, the ECB will have competence to supervise the branch if it is a significant entity. If the branch is less significant, the host country national competent authority will have competence to supervise its compliance with EU bank prudential regulatory requirements.

(p. 66) 2.81  The ECB shall act as the ‘consolidated supervisor’ over credit institutions, financial holding companies and mixed holding companies on a consolidated basis. The ECB has plenary competence to supervise all the operations of the credit institution and financial holding companies established in participating Member States or in a Member State that has opted into the SSM on a cross-border basis regardless of whether the credit institution is operating through subsidiaries or branches in the participating host state. Under the SSM Framework Regulation, the ECB’s practice has been to allocate powers of consolidated supervision by direct supervision of significant institutions that are determined as such on a consolidated basis ‘where the parent undertaking either is a parent institution in a participating Member State or an EU parent institution established in a participating Member State’.173 The relevant national competent authority in the state where the credit or parent institution is established is responsible for supervising the same financial entities that are deemed by the ECB to be less significant.174

2.82  The exercise of supervisory powers by the competent authority of the host Member State is governed by Article 14 of the SSM Framework Regulation. The ECB has supervisory competence over the host Member State where the branch is significant and will supervise the branch directly. Where the institution is less significant, the ECB allocates supervisory powers to the host Member State.175 Where a credit institution from a non-participating Member State seeks to provide services in a participating Member State, the non-participating NCA is required to notify the host participating Member State which shall then notify the ECB.176

2.83  The ECB competence to supervise credit institutions in host Member States for the free provision of services where the institution is established in a non-participating Member State raises important legal issues regarding the scope of host Member State authority to impose conditions on the provision of services (ie consumer financial services) for the general good or pursuant to other areas of EU or domestic law.177 For instance, the ECB’s supervisory competence does not include the competence of participating host states to use their powers to adopt domestic legislation implementing EU directives that require significant or less significant institutions to comply with requirements concerning anti-money laundering, counter terrorist financing including sanctions, and conduct of business in the sale of financial products (ie MiFID II).

2.84  A significant entity seeking to establish a branch or provide services in a non-participating Member State is required to notify its relevant NCA.178 The home (p. 67) state authority then will be required to inform the ECB, which will exercise the powers of home country supervisor under EU law. A less significant entity is required to inform the relevant NCA where it is established. The NCA will then exercise the powers of the home state supervisor. The role of the host Member State therefore depends on the significance of the supervised entity. This influences the host state authority’s right to receive notifications from the ECB and home state authorities. It also influences the role of the host state in participating in the college of supervisors for that particular institution. However, all incoming branches—either as part significant or less significant entities—are subject to the domestic law requirements that implement other EU legislation that impose conditions on the branches in the interests of the general good.

2.85  Under the home-host framework, the Supervisory Board’s role in overseeing the cross-border operation of significant institutions extends not only to banks established in participating Member States but also to banks and mixed financial conglomerates based in other EU states and third countries. This results in considerable influence for the ECB over the home operations of incoming institutions in the areas of capital and liquidity management and risk governance. The ECB has utilized multi-disciplinary and multi-lingual teams of supervisors to apply intensive scrutiny of the home country operations of systemically significant institutions with branch operations in participating Member States, butthere are concerns that the SB and the JSTs attempt to micro-manage and second guess home country authorities on matters related to bank governance and capital management has created unnecessary frictions with home country authorities. On the other hand, the governance failure at Danske bank involving the bank’s systemically important Estonian branch accepting €25 billion of deposits from Russian and Ukrainian entities without verifying the sources of the proceeds has shed light on misconduct risk and raised doubts about the ECB’s capacity to prevent or limit governance failures at institutions with systemic branches under SSM supervision.179 The ECB has also demonstrated shortcomings as a home country supervisor in co-ordinating with home country NCAs to ensure that large systemically important institutions with subsidiaries operating outside the EU are not being used as vehicles for tax evasion and money laundering.180

2.86  Brexit also poses a number of concerns for the ECB in conducting home-host oversight of Eurozone-based banks with significant trading operations in London. In most cases to date, the ECB has deferred to UK supervisors in overseeing the (p. 68) significant branches or subsidiaries of Eurozone-based banks with large trading operations in London. Many of these banks engage in ‘back-to-back’ trades through their London offices that require that they keep centralized risk management functions, capital and liquidity support booked in the London branches or subsidiaries. The ECB stated in 2018, however, that post-Brexit it will require Eurozone based banks with London offices to move their back-to-back trading operations back to subsidiaries based in Banking Union jurisdictions to be directly supervised by the ECB. Home-host co-ordination between the ECB and other EU states and third country states (especially the UK post-Brexit) will continue to create supervisory tensions and therefore remain a work in progress.

3.  Supervisory Review and Legal Uncertainty

2.87  The SSM legal framework’s interaction with EU prudential banking legislation has created a number of complexities and uncertainties regarding the allocation of powers between the ECB/SSM and NCAs over the implementation, application, and enforcement of prudential supervisory requirements. Some ECB supervisory requirements are defined by EU Regulations (ie Capital Requirements Regulation 2013) that apply directly to the Member States and for which the ECB has competence to interpret and apply to both significant and less institutions, whereas some supervisory powers are defined by Directives (ie the Capital Requirements Directive 2013) that must be interpreted and implemented by Member States into their domestic law before the ECB can apply them to institutions. This parallel process of applying the requirements of Regulations and Directives has created complexity and legal uncertainty because the definition and scope of prudential requirements that derive from Directives may vary across Member States due to differences in implementation and in the scope of discretion and opt-outs between NCAs. Moreover, even under SSM Regulation Article 4(3), where a regulation (ie CRR) provides for options for Member States, the ECB will ‘apply the national legislation exercising those options’. Although Article 4(3) intends to contribute to coherent supervision, it may ‘paradoxically’ prevent it,181 as the ECB can apply different opt-outs or delegations under different national laws for significant institutions, which are simultaneously also applied by NCAs for less significant institutions.182 This has resulted in the ECB having to apply different prudential requirements and opt-outs under domestic law that derive both from Regulations and Directives.183 These discrepancies in national legislative and regulatory requirements between Member States (which the ECB must apply) create an un-level playing field, legal uncertainty and potentially undermine the further (p. 69) development of a harmonized banking supervisory framework in the Banking Union and in the EU.184

2.88  Although this could potentially create ‘inconsistencies and contradictions’ in the interpretation and application of the new European supervisory framework because of the extent of discretions and options under Member State law, the ECB is expected to manage these discrepancies by applying the SREP in a manner that mitigates the inconsistencies between Member States, but it is recognized that more needs to be done.185

2.89  Also, further complexity arises when the ECB applies national law when EU directives are transposed into domestic law, which demonstrates the complexity in a regulatory system in which the ECB applies and implements national law deriving from EU directives differently across participating Member States than it does when it implements national law deriving from Regulations.

2.90  Beyond core areas that are ‘adjacent’ to prudential supervision, there are a number of supervisory competences which the ECB has declared to fall within its remit. In letters of the summer of 2016 and the spring of 2017, the ECB has ‘clarified’ which ‘specific supervisory powers granted under national law which are not explicitly mentioned in Union law’ nevertheless fall within the scope of the ECB’s direct powers.186 The ECB calls this a ‘clarify[cation] (sic) of the delineation of competences between the ECB and the [NCAs] as regards the exercise of certain supervisory powers granted under national law’ which it has carried out in co-operation with the Commission. The supervised entities are requested187 to address the relevant Joint Supervisory Team on such matters (with certain exceptions, in which cases they still need to involve the NCA as the first contact point). National law continues to apply. Notably, State procedural provisions will determine the outcome of the ECB’s assessments, which will be carried out in compliance with the national legal provisions.

2.91  This includes outsourcing; requests for information to auditors; approval of holdings in non-banks or in banks outside the EU; mergers or asset transfers; the appointment of external auditors; and of key function holders. Most relate to significant institutions only, while others concern all credit institutions—this distinction goes back to the fact that the ECB exercises full supervision of significant institutions but is also responsible for authorization and assessment of the (p. 70) suitability of shareholders of all credit institutions. The EU legislator has made the ECB the gate-keeper of the banking market across the Euro Area. Because of the central importance of these competences to the soundness of banks, the ECB is competent to apply these national provisions, and to specify so to the supervised entities. The legislator has not been able to identify all the applicable national provisions in advance and to determine which were to be exercised by the ECB and which by NCAs. Instead, it relied on a wide description of the relevant laws the ECB is to apply. The ECB asserts that it ‘may also exercise supervisory powers granted under national law, even if they are not explicitly mentioned in Union law as they (i) fall within the scope of the ECB’s tasks under Articles 4 and 5 of the SSM Regulation; and (ii) underpin a supervisory function under Union law.’188 Article 9(1), paragraph 3 of the SSM Regulation provides that the ECB can instruct NCAs to make use of their powers ‘under and in accordance with the conditions set out in national law’ but that the ECB’s use of such powers is limited to the extent that it is necessary for it to discharge its tasks under the SSM Regulation and only to the extent that the SSM Regulation ‘does not confer such powers on the ECB.’189 Article 9(1), paragraph 3 cannot therefore be used to vest the ECB with new supervisory tasks.

2.92  Nevertheless, a certain ‘competence creep’ may seem to be implied for the supervised entities as they had to adapt to different modes of operations during periods of market instability such as between the winter of 2014 and the spring of 2017. Further alignment of supervisory practices may lead to harmonization of national rules, even when not implementing one-to-one provisions of EU directives, such as CRD IV. In this way, the ECB is in a position to facilitate a type of bottom-up harmonization.190

2.93  The ECB published an advisory letter in 2017 providing an overview of the national provisions which, henceforth, are considered ECB competences.191 Although this letter provides useful insight into what areas of national prudential law that the ECB believes falls within its jurisdiction, the ECB also provides a detailed list indicating which areas of supervision remain the sole competence of NCAs/Member States. Specifically, the ECB states in the advisory letter that:

national authorities remain exclusively competent to exercise powers which do not fall within the scope of the ECB’s tasks or which do not underpin the ECB’s supervisory function. This applies in particular to (i) macroprudential supervisory tasks, (ii) the approval of mergers from a competition law, (iii) the ‘supervision’ of external auditors, (iv) the imposition or enforcement of conditions attached by regulation to banking activities such as product rules; and (v) the imposition of penalties to (p. 71) absorb the economic advantage gained from the breach of prudential requirements (which primarily serve competition law purposes).192

2.94  The areas of supervision identified by the ECB as not its own, because neither falling within the scope of the ECB’s tasks nor underpinning the ECB’s supervisory function, is a recognition of the limits of its supervisory competences and the barrier beyond which its efforts to promote harmonized standards are unlikely to go. However, it should be noted, as discussed below, that the ECB itself does have an explicit macroprudential function pursuant to Article 5(2) of the SSM Regulation, so that the ‘exclusivity’ of macro oversight for NCAs is debatable.

2.95  What has become apparent since the SSM became operational and a future challenge is that the boundaries between European and national competences may be blurred regarding what the ECB should be expected to do when confronted with national law that has not, or has incorrectly, implemented Union law. Incorrect transposition has included cases where the ECB, as a European institution, cannot but find that there has been an incorrect implementation. This latter case can be distinguished from the many cases where implementation cannot be said to be incorrect but simply to deviate from the approach taken in other Member States (varied implementation). In case the ECB is confronted with national law which does not implement a directive, such as CRD IV, in order to avoid the complexity and uncertainty of a Commission infringement proceeding, the ECB might consider, in cases where applying national law would lead to obviously incorrect results while making it impossible for the ECB to implement its task of providing ‘supervision of the highest quality, unfettered by other, non-prudential considerations’193 to apply (its reading of) the relevant directive, basing itself on its European mandate to supervise. Supervisory action would be based on the combined legal basis of the directive and the SSM Regulation, thus circumventing the prohibition of inverse vertical effect of directives,194 ie the tenet of EU law that directives cannot be invoked against individuals.

2.96  Nevertheless, the SSM framework foresees a ‘crucial role for the NCAs that clearly goes beyond the ECB in exercising its supervisory powers’. Since the establishment of the SSM, the ‘hybrid nature’ of the substantive rules has led to an ‘intensive’ co-operative relationship between the ECB and NCAs which is a condition for the success of the framework.195 This ‘bottom-up’ approach in the SSM framework where much of the activities depend on decentralized decision-making (p. 72) taken lower down the hierarchy involving JSTs and SB decisions mainly grounded on JST and NCA involvement appears to be making slow and uneven progress towards supervisory convergence.196

4.  SSM, NCAs/NDAs, and Macroprudential Tools

2.97  Since the creation of the SSM, there has been legal and institutional uncertainty over the extent to which the ECB/SSM has primary competence to exercise macroprudential tools, and there has been tension between the ECB/SSM and national competent/designated authorities over the timing and use of macroprudential tools. Macro-prudential regulatory tools generally involve a broader array of prudential supervisory tools that include both some ex ante supervisory powers and ex post crisis management measures, such as liquidity and resolution tools, deposit insurance, and lender of last resort.197 In EU Member States, either central banks or other nationally-designated macroprudential supervisory authorities have the authority to utilize macroprudential levers or tools (ie counter-cyclical capital requirements and loan-to-income ratios) to address the build-up of systemic risks.198 For example, the use of counter-cyclical capital requirements can be varied depending on the riskiness of assets at points in the economic cycle. Since the creation of SSM, Denmark and the Netherlands have used counter-cyclical capital buffers to dampen credit booms in their respective housing markets by imposing higher capital requirements on home mortgage loans as opposed to other types of loans. Regarding the Dutch central bank’s use of macroprudential tools, there have been some ‘teething’ issues that have created concerns with the SSM Supervisory Board. Other macroprudential measures include liquidity tools that require financial institutions to hold certain ratio of liquid assets, ie assets that can be easily turned into cash, relative to total assets.199

(p. 73) 2.98  The SSM Regulation allocates broad competences and powers to the ECB in the field of prudential supervision for individual credit institutions and financial holding companies, but the scope of those competences are limited by the Treaty and the enumerated tasks set forth in Article 4 of the SSM Regulation. However, Article 5 of the SSM Regulation confers to the ECB a limited number of macroprudential tasks and tools. Under the heading in Article 5, entitled ‘Macroprudential tasks and tools’, the ECB is allocated powers to impose stricter prudential requirements, including higher capital buffers, on individual banks based on macroprudential factors in the country where the bank is based.200 Although the exercise of these macroprudential tools rests primarily with the National Competent Authorities (hereinafter the ‘NCAs’),201 the ECB may intervene and utilize these tools ‘if deemed necessary’ to apply higher requirements than those set out by the national authorities.202 In particular, it can adopt specific measures if required to take the specific circumstances of the Member State’s financial and economic situation into account203 as well as ‘duly consider’ any objection of a national competent authority that seeks to address a macroprudential risk on its own.204 Moreover, the CRR permits the ECB as the competent supervisory authority to take macroprudential tools, other than increased capital buffers, only in limited circumstances for banks based in a participating SSM Member State where the ECB has identified macroprudential or systemic risks.205

2.99  Although the ECB has specific powers to impose stricter prudential requirements and additional capital buffers have been carved out in Article 5 of the SSM Regulation,206 the use of these tools now rests primarily with the national designated authorities. Under the SSM Regulation, the term used for national macroprudential authorities is ‘national designated authorities’ (NDAs). The NDA can, but does not have to, be identical with the national competent authority (NCA). Article 4 of CRD IV provides that the NCA or NDA (if the NDA is the same as the NCA) should have the expertise, resources, operational capacity, and the powers and independence to monitor effectively credit institution’s activities, assess compliance, and investigate breaches. However, if the NDA is not the same body as the NCA, the NDAs (not the NCAs) will be responsible (p. 74) for macroprudential tasks and tools, such as imposing ‘counter-cyclical buffer rates’.207 Furthermore, NDAs are empowered to propose draft national legislation if they identify changes in the intensity of systemic or macroprudential risks in the financial system.208 The draft national legislation can be rejected within a one month period by the Council, but only upon a proposal by the Commission.209 As discussed above, the ECB may decide (instead of the NDA) to exercise a macroprudential task regarding a credit institution based in a participating Member State ‘if deemed necessary’,210 but is then required to take the specific circumstances of the Member State’s financial and economic situation into account211 as well as ‘duly consider’ any objection of an NDA or NCA proposing to address the local situation on its own.212

2.100  The ECB shall apply the macroprudential tools referred to in Article 101 of the SSM Framework Regulation in accordance with this Regulation and with Articles 5(2) and 9(2) of the SSM Regulation, and where the macroprudential tools are provided for in a directive (ie CRD), subject to implementation of that directive into national law. If an NDA does not adopt a macroprudential tool (ie a counte-cyclical buffer), this does not prevent the ECB on its own initiative from setting a capital buffer requirement in accordance with the SSM Framework Regulation and Article 5(2) of the SSM Regulation.

2.101  Articles 101 and 102 of the SSM Framework Regulation established the scope of macroprudential powers. Article 101 provides a list of macroprudential tools213 that include, but are not limited to, counter-cyclical capital buffers, loan-to-income limits, measures for domestically authorized credit institutions, any other measures to be adopted by NDAs or NCAs aimed at addressing systemic or macroprudential risks set forth under EU law.214 The ECB shall apply the macroprudential tools referred to in Article 101 in accordance with this Regulation and with Articles 5(2) and 9(2) of the SSM Regulation, and where the macroprudential tools are provided for in a directive, subject to implementation of that directive into national law. If an NDA does not utilize a macroprudential tool (ie set a capital buffer rate), this does not prevent the ECB from utilising that tool in accordance with this Regulation and Article 5(2) of the SSM Regulation.

(p. 75) 2.102  Furthermore, the SSM Framework Regulation contains procedural provisions for the use of macroprudential tools by the ECB and participating Member State authorities with competence under national law to exercise macroprudential tools (the so-called ‘NDAs’).215 Article 103 SSM Framework Regulation provides that the ECB shall compile a list of the NDAs and NCAs of participating Member States that have authority under Member State law to utilize macroprudential tools. As macroprudential tools are a limited and a shared task for the ECB under the SSM Regulation and the CRR, Member State NDAs and NCAs have retained competence to use a broader number of macroprudential tools.

2.103  As part of the procedure on macroprudential tasks of the ECB, under the SSM Framework Regulation, the NDAs and NCAs are required to inform the ECB both of their intention to use macroprudential tools, the systemic risks they are designed to address, and the actual decision to use such measures.216 The decision to use macroprudential tools must be notified to the ECB in advance not less than ten days before the decision is actually taken, and the identification of systemic risks by NDAs or NCAs must be notified to the ECB as soon as possible after the risks are identified. The ECB can object to the use of macroprudential tools but must put its objections in writing and convey them to the relevant NDA/NCA. Before deciding to use (or not) the macroprudential tools, the relevant NDA must duly consider the ECB’s objections before proceeding with the decision.217

2.104  Where the ECB has competence to apply macroprudential tools that impose stricter requirements on banking institutions, it shall co-operate closely with the competent NDAs/NCAs and inform them of the intended decision. If the ECB decides to apply more stringent macroprudential tools to credit institutions that are subject to the CRR and the CRD IV, the ECB is required to inform the relevant NDAs/NCAs as early as possible of identification of systemic or macroprudential risks and the details of its use of specific macroprudential tools.218 NDAs and NCAs may object to the ECB’s decision to use macroprudential tools by stating their reasons in writing which shall be duly considered by the ECB.219 The ECB must notify its intention to co-operate closely with the concerned NCA or NDA ten days before taking the decision and respond to their objection by stating its reasons for action within five working days.220 It is questionable whether this five day response period for the ECB is adequate for it to formulate an appropriate response to a NCA or NDA and therefore the ECB may be reluctant to take a (p. 76) decision to adopt a macroprudential tool (ie increased counter-cyclical buffers) when a NDA does not think that such a measure is necessary because of the relatively short period of time the ECB would have to respond a NDA’s objection. Regarding the role of host state authorities where the local operations (ie branch) of a credit institution based in a participating Member State, the principle of co-operation applies as to the decision of whether to take macroprudential tools. Host country authorities are also subject to the notification obligation regarding their decision to impose macroprudential tools on the local operations of a credit institution based in a participating Member State.

2.105  Indeed, the use of macroprudential tools to monitor and control systemic risks and related risks across the financial system—require greater regulatory and supervisory intensity that will necessitate increased intervention in the operations of cross-border banking and financial groups and a wider assessment of the risks they pose. Under the SSM, the main question that remains open regarding the use of macroprudential tools is whether the ECB has the necessary scope of authority to be an effective macroprudential supervisor. The European Commission has consulted on this issue but decided in 2017 to adopt only cosmetic changes to the current EU institutional framework of financial supervision, such as the composition of the European Systemic Risk General Board (ESRB) and making the president of the ECB automatically the Chair of the ESRB.221 Despite these incremental reforms, the ESRB remains a soft law body with no binding competence and with the authority only to issue recommendations and warnings, not technical standards like the ESAs. Thus, the proposed changes do not address the issue that the ECB has limited authority and tasks in respect of macroprudential oversight despite the fact that with the European Banking Union, the ECB has become a Euro-wide micro-prudential bank supervisor. Hence, there remains a gap in banking supervision at the EU level because there is no body with the legal competence and powers to perform fully macroprudential supervision and regulation.

2.106  From a macroprudential perspective, the SSM should help to mitigate systemic risk at the level of the individual credit institution. However, the ECB has only the competence to supervise individual banks or ‘credit institutions’ as defined under (p. 77) EU law.222 As a result, the ECB has only limited authority to impose regulation aimed at reducing systemic risk, involving, for example, imposing higher capital and liquidity requirements on individual banks.223 It does not have competence to regulate non-bank financial intermediaries—such as shadow banks—nor does it have the competence to regulate the off-balance sheet entities involved in the securitization and structured finance markets that are increasingly playing a greater role in channelling large volume of credit and leverage to European businesses and consumers.224 In other words, the ECB has very limited authority to address macroprudential systemic risks that can arise outside the formal banking sector where non-bank financial intermediation is growing.

2.107  The ECB’s limited authority to address systemic risks is likely to remain unchanged in the near future. As discussed above, the Commission’s 2017 the CRD V Regulation and Directive225 (CRD V Package) have the aim of making prudential regulation more proportionate. One way the CRD V does this is by making the regulation of securities and investment firms that are deemed to be systemically insignificant less stringent as part of the Capital Markets Union initiative that is designed to increase the flow of capital to European companies and entrepreneurs from non-bank finance sources.226 Specifically, the CRD V reforms propose to reduce capital, liquidity, and risk management requirements for certain investment and securities firms (including investment firm groups without a credit institution) that are currently subject to the CRD IV. CRD V would create a category of securities and investment firms that would be deemed to be non-systemic and thus subject to much less stringent prudential requirements. CRD V aims to make prudential regulation for securities and investment firms more proportionate to the risks that they pose to the financial system and economy. It is also designed to support the objective of loosening regulatory requirements for securities and investment firms and companies seeking to raise capital in the EU markets.

(p. 78) 2.108  However, a few systemically important investment firms, defined as such under Article 131 of CRD IV, would still be subject to the CRR/CRD IV capital, liquidity and risk governance requirements because these firms incur and underwrite risks (both credit and market risks) on a largescale basis in the EU single market. The rationale for subjecting smaller and systemically less important institutions to exemptions from the CRD IV prudential requirements is based on the lower level of perceived systemic risk they pose to the financial system.227 This is meant to provide a ‘more streamlined regulatory toolkit’ to allow these firms to provide services more efficiently across different type of business models and to adjust prudential requirements accordingly to reflect the diminished systemic risk they pose to the financial system.228 An important omission in the CRD V package, however, remains that it does not address the financial stability risks that appear to be emerging the EU shadow banking market.229

5.  Financial Market Infrastructure

2.109  One of the basic tasks to be carried out by the European Central Bank as a member of the European System of Central Banks (ESCB) is the promotion of the smooth operation of the payment system.230 Further, Article 22 of the Statute of the ESCB provides the ECB with the important power to adopt regulations to ensure the efficiency and soundness of EU clearing and payment systems within the Union and between the Union and other countries.231

2.110  Based on this legal authority, the ECB argued in a legal opinion in January 2011232 that the European Market Infrastructure Regulation (EMIR) should be amended so that the ESCB’s role in exercising oversight of EU derivatives clearing systems is recognized and that it has joint authority with ESMA to review and approve regulations for CCPs and the infrastructure of clearing within the EU. It also argued that the ECB should have joint authority with ESMA to recognize the laws and regulations of third country clearing systems as equivalent in order for third country CCPs/clearing houses to be given market access to the EU markets. In addition to the ESCB’s responsibility for the smooth operation of payment systems, the ECB has argued that the ESCB’s responsibility (p. 79) ‘to implement the monetary policy of the Union’ in Article 127(2) indent 1 (also provided in Article 3.3 of the Statute of the ESCB) depends on its ability to promote the smooth operation of clearing and settlement systems and infrastructures and therefore is a basic task of the Eurosystem.233 The ECB also observes that national central banks whose currency is not the euro would also have similar powers to oversee clearing and related infrastructure as the ECB would have in acting through the National Central Banks of the Eurosystem. The ECB adopted a location policy in 2013 for derivatives central counterparties or clearing houses to encourage those based in non-Eurozone Member State jurisdictions and that who cleared a large amount of euro-denominated derivatives to be based in a Eurozone jurisdiction. The location policy was designed to make it easier for the ECB to have direct oversight of derivatives clearing houses that cleared a large amount of euro-denominated derivatives. The United Kingdom challenged the ECB location policy on the grounds that it infringed the provisions of the EU Treaty governing free movement and that it was beyond the ECB’s Treaty competences (‘ultra vires’).234 The CJEU ruled in favour of the UK by rejecting a broad interpretation of the ECB mandate and annulled the location policy, relying on a purposive interpretation of the ESCB Statute that would require the ECB, if it wanted to grant itself powers to regulate securities clearing infrastructures, to show how that power would relate to the performance of its tasks refererd to in the fourth indent of Article 127 (2) TFEU and ‘to request the EU legislature to amend Article 22 of the Statute, by the addition of an explicit reference to securities clearing systems’.235 When EMIR was adopted in 2012, however, the suggestion that the ECB have oversight authority of CCPs and clearing houses was questioned on the grounds that it could result in national central banks and in particular the ECB operating through the Eurosystem engaging in supervisory oversight of CCPs, which are authorized credit institutions in many EU states, which could not at the time be subject to direct ‘prudential supervision’ by the ECB unless there was unanimous consent by the Council of Ministers.236 Council’s unanimous approval, however, in 2012 to authorize the ECB to be responsible for prudential policies relating to credit and financial institutions, including mixed financial conglomerates, has eliminated any doubt as to its role in supervising credit institutions, as set forth in the SSM Regulation. In some EU states, central counterparties and clearing houses are required to be (p. 80) operated and owned by credit institutions and are therefore subject to supervision by the national competent prudential authority. In other EU states, securities regulators are responsible for supervising CCPs/clearing houses. The EMIR Regulation delegates powers to ESMA to set regulatory technical standards and to oversee Member State implementation of the EMIR requirements. Although the SSM Regulation authorizes the ECB to supervise credit institutions in respect of the single rule book (CRR and CRD IV), it does not authorize the ECB to ensure that credit institutions have complied with EMIR, as this remains the responsibility of NCAs.

2.111  Further, the draft legislation to amend the CRR and CRD IV does not mention supervision of CCPs and clearing houses or other financial market infrastructure, such as central securities depositories. The EU legislator should consider whether to extend ECB competence to supervise CCPs and clearing houses because of the potential systemic risk they pose to the financial system. The ECB’s oversight function for clearing and payment systems set forth in the Treaty provides a legal basis for the exercise of such powers without secondary legislation. However, to resolve any legal uncertainty about ECB competences more generally and the SMM more particularly it may be desirable to recognize—or reaffirm—the ECB’s competence in this area by amending the SSM regulation to provide expressly for SSM competence to supervise CCPs/clearing house—both within and outside credit institutions—to protect the financial system against the concentration of risks in financial market infrastructure that can lead to systemic risks.

2.112  In addition, the ECB’s Target2 securities framework has dramatically changed the landscape of securities settlement in Europe and necessarily involve the central securities depositories, agent banks and custodian banks in more cross-border consolidation, especially for the settlement of cash financial instruments (eg equities and bonds). The increased consolidation of central securities depositories raises concerns about systemic risk and how CSDs and securities and derivatives settlement systems should be regulated. For example, delivery versus payment procedures in EU central securities depositories affect principal and settlement risk (a form of systemic risk) and therefore should be harmonized if possible by adopting one of the three main DvP procedures recommended by the Committee on Payment and Settlement Systems.

2.113  In its role as a central bank and supervisor, the ECB will be confronted by the problem of the assumption of risk by CCPs and the CSD’s in the form of credit, settlement risk and principal risk exposures in complex financial markets. The role of the ECB should be examined at a deeper level, especially in times of market stress, regarding its functions for overseeing clearing, settlement and payment systems and how this can be co-ordinated with its role as a bank supervisor.

(p. 81) VI.  Member State Perspectives on the SSM

2.114  The Deutsche Bundesbank has called the SSM a success story.237 Nevertheless, Bundesbank officials have stated that there are many challenges, including ‘striking a balance between harmonization and proportionality’ that should be related to the specific characteristics (size, significance, riskiness) of individual institutions; and NCAs should retain supervisory competence over less significant institutions; and the extensive number of options and national discretions—around 150 options under EU banking regulations—to choose from can be an obstacle to a regulatory level playing field. As a result, there is recognition for the need of further harmonization of options and discretions.238

2.115  The Bundesbank also recognizes the institutional challenges posed by the SSM, particularly how the ECB can manage the conflicts of interest that arise over monetary policy and banking supervision, as some of the ECB’s monetary policy functions for injecting liquidity into the banking system require an understanding of individual bank balance sheets that it may not have adequate knowledge of now because of ‘Chinese walls’ between the monetary policy and supervision functions. Also, the conflict of interests that arise from having the Governing Council approve all substantive decisions of the SB creates a conflict of interest within the ECB. Bundesbank officials still doubt the effectiveness of this governance structure, and suggest limiting the Governing Council’s involvement in many supervision decisions.239

2.116  EU bank capital legislation appears to contain a loophole concerning the lack of a requirement under EU bank legislation for EU-based banks to hold regulatory capital against their holdings of their home country’s sovereign bonds. Throughout the SSM, Member States have adopted different approaches to this practice. Because it is not mandated under EU banking legislation, there is nothing the ECB/SSM can do to require banks under their supervision to hold regulatory capital against these positions. Different approaches within the SSM to sovereign risk exposures exist. Supervisors could still take these risks into consideration when conducting stress tests and requiring banks to hold capital against these exposures under hypothetical stress scenarios and under other pillar (p. 82) 2 supervisory review assessments. The Bundesbank suggests the following regulatory treatment: (1) risk weights for risks arising from sovereign exposures; and (2) an upper limit for lending to individual governments. Bundesbank officials believe that sovereign bond risks pose a risk to the Banking Union because of the contagion risk of a bank failing because of high default risk on certain sovereign bonds.240

2.117  In addition, Bundesbank board member, Andreas Dombret, expressed the view that further reforms needed to be made at the SSM, including streamlining decision-making as the current system is too bureaucratic; for instance, the 19 countries on the Governing Council are required to be consulted on most SB decisions. More delegation should occur as the ECB’s Governing Council should not decide on routine matters; and the EBA should be granted more powers. A related concern arises where the ECB makes a determination that a bank is failing or about to fail based on an assessment of its compliance with anti-money laundering and financial sanctions requirements by a non-EU authority (such as the United States in the case of the Latvian bank ABVL) where such a determination should have been made only after the EU national competent authority had also made a determination that EU law had been violated. The failing Latvian bank ABVL pointed to the need of extended powers on European level. Here, the ECB determined the bank as ‘failing or likely to fail’ only after the US Treasury claimed it was involved in money laundering))241

2.118  The Banque de France expressed similar concerns and considered the main challenge for the SSM to be growing fragmentation in regulatory rules, the need to enhance the effectiveness of the Supervisory Board’s decision-making, and excessive detailed scrutiny by the Governing Council of SB decisions. Also, there lacks (p. 83) a European-wide supervisory culture, which hinders harmonization of supervisory practices.242

2.119  The Banco de Espana was more sanguine in its assessment of the SSM commenting that it has led to an appreciable increase in the banking sectors capital and has prompted the most vulnerable banks to begin cleaning up their balance sheets and selling or otherwise disposing of impaired loans. The SSM has also shown itself as being capable of participating effectively in the resolution of crisis episodes’ (eg Greek banks).243 The SSM has managed to eliminate many of the ‘national regulatory particularities’ and created a common methodology for supervisory review of all banks and has made significant progress in harmonising inspection practices by drafting and developing a manual of common procedures’ The joint supervisory teams have been effective in conducting on-site inspections and building co-operation between ECB and NCAs. Although institutional co-operation between ECB and NCAs (due to complexity of tasks) could be improved, co-operation and co-ordination at a general level was present and a common supervisory culture was emerging.

2.120  The Banca d’Italia has assessed the SSM’s operations as effective, even though it was conceived over a very short period of time and has been operational for only five years.244 Admittedly there have been co-ordination difficulties among NCAs and the ECB because of different histories, traditions, and cultural practices, but ‘co-operation between the national and the central level, after some initial friction, is now smoother.’245 Indeed, the Nordea case represents an example of how the perception of an effective and co-operative relationship between the national competent authority and the ECB can lead to a bank changing the domicile of its parent company to the Eurozone to benefit from SSM oversight.246

VII.  Banking Union and the Banking Industry

2.121  This section analyses the impact of the Banking Union on banking market structures and cross-border merger activity.

(p. 84) 1.  Banking Industry Reaction

2.122  The German Bankenverband published a report that assessed the effect for German banks in complying with technical standards and guidelines adopted by the SSM, EBA and NCAs (Bafin). It was noted that it is sometimes not straightforward to understand which rules a bank was required to comply. The report provided examples of existing German regulatory rules (MaRisks: Mindestanforderungen an das Risikomanagement) and EBA recommendations on Cloud Service Providers. It was argued that it was in the discretion of the NCAs to follow the recommendations or not. In case they did not follow the recommendations, it was said that it may be confusing, especially for banks that are supervised by the ECB but which provide services into non-Banking Union Member States, which are subjected solely to the EBA standards.247 there seems to be an inconsistency on processes of the SSM, but the general view should be true)

2.123  Another area of concern of the banking industry has been the methodology utilized by the SSM for the Supervisory Review and Evaluation Process (SREP). Prior to the SSM, national competent authorities developed SREP methodologies under guidelines set by the European Banking Authority and based on the Capital Requirements Directive 2013. However, the Directive afforded Member States with legislative and regulatory discretion regarding how the SREP was implemented. This resulted in significant differences in SREP methodologies across some Member States.248 With the ECB now overseeing the application of the SREP methodology across participating Member States, the industry has expressed two concerns. During the ECB’s first SREP exercise in 2015, the industry found it difficult to understand the rationale behind the request for discretionary capital add-ons. This made it difficult for institutions to challenge the determination of the capital ad-ons. Second, it was difficult for institutions to assess what corporate and risk governance changes they should implement in the future in order to reduce their capital add-ons.

2.124  On the other hand, the industry stated that the ECB has provided much more detailed and better justified SREP reports and assessments than the previous SREP decisions made by NCAs prior to the SSM.249 The banking industry in 2015 also criticized the ECB’s lack of clarity on the interaction between the pillar 2 SREP capital add-on and the counter-cyclical capital buffer calculated under the CRD. The process for assessing these two requirements had been applied by Member (p. 85) States in a more transparent manner prior to SSM. The SSM assessments created legal uncertainty for the banks. Based on a Commission staff note in 2016, the ECB amended its methodology for 2016.250

2.125  Some Italian banks express the positive view that the SSM has required banks to adopt organizational structures enabling efficient management of impaired assets. An important issue in Italy has been the slow judicial recovery procedures for collateral on impaired loans. This led the SSM and Commission to agree guidelines regarding shortening the amount of time in which a bank must fully ‘depreciate’ impaired loans.251

2.  Mergers, Market Structures, and Integration

A.  Mergers

2.126  The SSM has also been related to changes in market structures in the EU banking sector. For instance, the mergers and acquisitions, including cross-border M&A, have substantially decreased since the SSM became effective in November 2014. Chart 2.1 below illustrates the low volume of M&As within (p. 86) the euro area, which reached its lowest level in 2016.252 It should be noted, however, that worldwide M&As in banking were significantly low in 2017 as well, with a volume of $79.6 billion compared to $359 billion in 2008.253 Therefore, it cannot be ruled out that the decline in bank M&A in the Eurozone may have been caused by other factors in global financial markets unrelated to creation of SSM.

Chart 2.1  Bank M&As involving euro area banks – value of transactions (EUR billions)

Sources: Dealogic and ECB calculations

Notes: “M&As” refers to transactions where the acquired stake is more than 20% of the target bank. The data do not cover participation by governments or special legal entities in the restructuring or resolution of credit institutions. Transactions whose amounts are not reported are excluded. “Domestic” refers to transactions that take place within national borders of euro area countries. “Cross-border” M&As involve euro area targets and non-domestic euro area acquirers. “Inward” refers to M&As by non-EU or non-euro area banks in the euro area and “outward” indicates M&As carried out by euro area banks outside the euro area.

2.127  There is speculation about future M&A activity in the Eurozone banking sector.254 One industry commentator stated that ‘those calling for cross-border bank consolidation are getting things the wrong way around. It is not cross-border M&A that will create an integrated single market, but an integrated single market that will drive cross-border M&A. And that does not look likely any time soon.’255

2.128  Moreover, the decrease in banking M&A in the Eurozone has also been attributed to the extra costs of higher regulatory capital requirements for merged banks that have grown in size and thus may qualify for SIFI capital ad-ons. Indeed, any significant bank considering a merger with another significant institution should weigh the cost of moving up the scale of systemic importance, which brings with it extra capital requirements.256

B.  Market Structures

2.129  Generally speaking, it has been said that the banking market in the Eurozone is ‘fragmented’ which can be, inter alia, seen in the fact that ‘there is one bank for about every 50,000 citizens in the Eurozone’257 ‘Since 2008, the number of banks in the euro area has declined by about 20%, to around 5,000. And the number of bank employees has fallen by about 300,000 to 1.9 million. Total assets of the euro area banking sector peaked in 2012 at about 340% of GDP. Since then, they have fallen back to about 280% of GDP.’258 The reduction in bank assets to GDP can also be attributed to the low interest rate environment in which bank customers have increasingly been buying more bank-issued financial products, in (p. 87) which the bank distributes the clients’ funds off balance sheet (rather than lending the clients’ funds on balance sheet to a borrower).259

2.130  The SSM has also been followed by an increase of cross-border branches instead of subsidiaries. In general it is not clear why this has occurred as it is too early to attribute any single cause. Wymeersch, however, had predicted in the first edition of this volume that conversions of cross-border owned subsidiaries into branches would grow in number not necessarily because of Banking Union, but because of ‘the massive deleveraging’ of banks or their ‘withdrawal from certain regional markets or from certain activities considered to represent less core activities, where the more stringent capital requirements, and later the structural measures, may have more far-reaching consequences.’260 Although the SSM Regulation states that it is neutral as to the choice of a bank’s form (branch or subsidiary), he observes that many banks may be reluctant to change their form from subsidiary into branch ‘in order to preserve their local brand, to preserve the relations with their employees, for tax purposes’ or other strategic reasons.261 But the European Commission has estimated that the impact of state bailouts of the banking sector and the desire of stronger home country scrutiny of cross-border operations has influenced banks in opting for more cross-border branches as opposed to subsidiaries.262

2.131  Other concerns are that there are not enough pan-European banks. Defining pan-European banks as consisting of branches or subsidiaries in at least three EU states, there are only two pan-European banks in Europe: BNP Paribas, (France, Italy and Benelux); and UniCredit, (Italy, Germany, and Austria). According to this view, regulation should support the creation of more pan-European banks to support the European economy.263

2.132  ECB officials believe that creating a few pan-European champions would reduce the reliance on US banks providing credit and trading support operations in Europe. Danièle Nouy, chair of the ECB’s supervisory board, stated that: ‘In my opinion, cross-border mergers within the euro area are the way forward.’ (p. 88) Moreover, ‘[w]hile the ECB would not reduce capital requirements for merged entities, officials indicate it could use its powers to help in other ways.’ This could involve, for example, allowing banks to offset more of their biggest exposures to individual clients across borders or increasing their flexibility to move capital and liquidity between countries.264

2.133  More generally, there appears to be growing optimism in the ECB’s role as a tough but fair regulator that has had a positive effect on bank performance. For example, the ECB has taken control of the non-performing loan problem that has bedevilled Eurozone banks whose assets (unlike US banks) are dominated by on-balance sheet lending. At the height of the Eurozone crisis in 2012, non-performing loans (NPLs) at Eurozone banks exceeded 7% of the value of total on balance sheet loans. Since 2015, NPLs have begun to decline, most recently with NPL levels falling to 3.4% of on-balance lending in 2018.

2.134  Despite progress on many fronts, the average European bank had a return on equity (ROE) of less than 6% in 2017, much less than the average of nearly 10% ROE for US banks. Also, Eurozone bank ROE remains less than the cost of capital. This is an important concern because it limits the ability of banks to raise capital when necessary, especially during market downturns. The ROE also limits the ability of European banks to compete effectively on global stage with US and Japanese banks.

2.135  The SSM framework must also contend with persistent weak bank performance in some European countries, such as Italy, Portugal, Cyprus, and Greece. In Italy, the fourth largest European national economy, the combination of a populist Eurosceptic government and a persistently weak banking system has revised the so-called ‘doom loop’ where banking sector fragility spreads to sovereign debt finances and can spiral downward into an economic crisis. Banks are increasing their sovereign debt exposure to their home country governments without having to hold regulatory capital against these assets. Bank exposures to sovereign debt are growing and the banks’ ability to raise capital sustainably is diminishing.265 Despite an overall positive effect on banking sector performance, the SSM has serious challenges in stabilising the Eurozone banking sector and overseeing its return to a sustainable financial position.

(p. 89) VIII.  Conclusion

2.136  The Banking Union has ushered in dramatic changes in the institutional structure of banking regulation, supervision and resolution. The chapter analyses the major transformation underway in the European Banking Union regarding the centralization of competences with the European Central Bank acting through the Single Supervisory Mechanism as a bank supervisor for Eurozone and other participating Member States and the institutional consolidation and legal changes brought about by the Single Resolution Mechanism for bank recovery and resolution. A major objective of the Banking Union was to sever the link between banking fragility and over-indebted sovereigns. Although the SSM Regulation has been praised as a necessary regulatory reform to enhance European banking supervision and restore euro area financial stability, it raises important institutional issues regarding the accountability and effectiveness of the European Central Bank as a bank supervisor and the challenges it faces in monitoring risks in the European banking sector and co-ordinating with European and Member State resolution authorities.

2.137  The Single Supervisory Mechanism began operations in November 2014 in the shadow of the Eurozone crisis that had debilitated the banking systems of much of southern Europe and Ireland. The ECB acting through the SSM has been credited with helping the European banking system address some of its most pressing challenges. The SSM oversaw the implementation of Basel III through the Capital Requirements Directive IV which resulted in significantly higher capital and liquidity buffers and enhanced oversight of bank risk management and corporate governance.

2.138  The SSM has also worked with the SRB to shore up the effectiveness of the single resolution mechanism by ensuring ‘a coherent and uniform approach’266 to bank resolution for euro area and participating Member States.267 The SRB has responsibility for all preparatory work involving bank resolution plans and resolvability assessments and co-ordinating the implementation of resolution plans with national authorities and interpreting the scope of the systemic crisis exception.

2.139  Although the SRM is an important institutional development to enhance cross-border crisis management in the Banking Union, its institutional complexity and the vast discretion (and uncertainty) regarding how SRB can use its powers will continue to raise important issues regarding investor rights in banks and other institutions that are subject to write-downs and/or taken into resolution. For the (p. 90) SRM’s resolution powers to be legally effective and to enhance the ECB’s role as a supervisor, they must be credible and predictable. An effective resolution regime should therefore require that resolution authorities adhere to the rules governing the use of resolution tools during a bank restructuring and even in a broader financial crisis. For example, regarding the use of the bail-in tool, market participants should have clarity about the order in which various types of bondholders will be expected to take losses. A predictable resolution mechanism is necessary to secure public acceptance and reduce market panic.

2.140  The chapter also discusses what legal powers the ECB has to supervise derivatives central counterparties and clearing houses and whether there is any institutional conflict between it and ESMA regarding the authorization and supervision of derivatives clearing houses. Although the ECB’s own legal opinion in 2011 counselled that it did have constitutional powers to exercise oversight of derivatives clearing houses, it has not expressly assumed these powers, even though it attempted to influence EU derivatives clearing policy in 2012 by issuing a more limited location policy (later invalidated by the European Court of Justice) that would have required all EU-based clearing houses which clear over a certain threshold of euro-denominated derivatives to do so from a Eurozone-based entity. Nevertheless, as the Banking Union consolidates further, this may change with the ECB assuming more oversight powers of systemically-important derivatives clearing institutions. Another important area where the ECB’s oversight is expected to extend will be in its supervision of financial institutions in respect of environmental and social risks. In light of the European Commission’s acceptance in 2018 of the proposals of the High Level Expert Group’s report on sustainable finance and regulation, the SSM is expected to calibrate existing regulatory tools in the areas of enhanced disclosure, risk management, bank governance, capital adequacy to address environmental and social risks.

2.141  Others challenges confronting the Banking Union and its effectiveness in supervising and resolving banks, for instance, include Brexit, which poses numerous challenges regarding SSM oversight of Eurozone banks with significant trading operations in London. The ECB has anticipated these challenges by stating in 2018 that it will require Eurozone based banks with London offices to cease ‘back-to-back’ trades that allows them to keep centralized risk management functions, capital/liquidity support booked in London branch/subsidiary. This practice will end in a few years with Eurozone based banks moving these functions from London to locations in the Eurozone.

2.142  The Banking Union has confronted enormous challenges in its institutional evolution but has made significant progress in its first five years in the areas of banking supervision and resolution. Despite the Union’s firm institutional and legal foundations established through the SSM and SRM, its overall tasks remain unfulfilled as political opposition remains steadfast against a Eurozone-wide deposit (p. 91) guarantee mechanism while there is growing opposition more generally to increased European supra-nationalism across the Union. The biggest obstacle to the future successful operation of the Banking Union may be whether its institutions (the SSM and SRM) can co-ordinate effectively with other EU institutions and Member State authorities in carrying out their tasks. Nevertheless, the Banking Union has brought about dramatic institutional changes to the governance and oversight of European banking markets, which is likely to spill-over to other areas of EU economic and financial policymaking.(p. 92)


1  See Danny Busch, ‘Governance of the Single Resolution Mechanism’ Ch 9.46–9.64 (this volume) in Danny Busch and Guido Ferrarini (eds), European Baking Union (2nd edn, Oxford University Press 2019).

2  The EDIS would eventually mean customer bank deposits up to €100,000 would be guaranteed by Eurozone taxpayer money. See European Commission, Communication To The European Parliament, The Council, The European Central Bank, The European Economic and Social Committee and the Committee of the Regions on completing the Banking Union, COM(2017) 592 final, Brussels, 11.10.2017.

3  See Hermann van Rompuy, ‘Towards a Genuine Economic and Monetary Union’ (Report by President of the European Council, EUCO 120/12, 26 June 2012), available online at <www.consilium.europa.eu/media/33785/131201.pdf> accessed 11 December 2018. See also, Euro Summit, ‘Euro Area Summit Statement’ (European Council 29 June 2012), available online at <www.consilium.europa.eu/media/21400/20120629-euro-area-summit-statement-en.pdf> accessed 11 December 2018. Several Eurozone governments were experiencing sovereign debt and banking crises in 2012, including Greece and Portugal (excessive sovereign debt), and Spain, Cyprus, Ireland (bank-driven crises), and both fiscal and banking fragility in Italy.

4  European Council, ‘ESM direct recapitalisation instrument—Main features of the operational framework and way forward’ (European Council 20 June 2013), available online at <www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/137569.pdf> accessed 7 December 2018, establishing conditions for a recapitalization of individual banks.

5  Commission, ‘Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating policies relating to the prudential supervision of credit institutions’ COM(2012) 511 final.

6  Council Regulation (EU) 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions [2013] OJ L287/63 (SSM Regulation); Regulation (EU) 1022/2013 of the European Parliament and of the Council of 22 October 2013 amending Regulation (EU) 1093/2010 establishing a European Supervisory Authority (European Banking Authority) as regards the conferral of specific tasks on the European Central Bank pursuant to Council Regulation (EU) 1024/2013 [2013] OJ L287/5.

7  See European Central Bank, ‘Note: Comprehensive Assessment October 2013’ (October 2013) 5–8, available online at <www.ecb.europa.eu/pub/pdf/other/notecomprehensiveassessment201310en.pdf> accessed 7 December 2018, discussing specific objectives of asset quality review; European Central Bank, ‘ECB to disclose final results of comprehensive assessment’ (ECB Press Release, 10 October 2014), available online at <www.ecb.europa.eu/press/pr/date/2014/html/pr141010.en.html> accessed 7 December 2018.

8  Regulation (EU) 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) 1093/2010 [2014] OJ L225/1 (SRM Regulation).

9  See Jean-Claude Juncker, ‘Completing Europe’s Economic and Monetary Union’ (European Commission, 22 June 2015), available online at <https://ec.europa.eu/commission/sites/beta-political/files/5-presidents-report_en.pdf> accessed 7 December 2018.

10  See Eddy Wymeersch, ‘The Single Supervisory Mechanism for Banking Supervision Institutional Aspects’ Ch 4 (this volume) in Danny Busch and Guido Ferrarini (eds), The European Banking Union (2nd edn, Oxford University Press 2019). See also Joined Cases T-133/16 to T-136/16, para, 81, in which CJEU upholds ECB’s interpretation of Directive 2013/36 as ‘lay[ing] down specific rules concerning good governance of credit institutions, which preclude, in principle, the chairman of the management body in its supervisory function from being also responsible for the effective direction of the business of the credit institution’. See also Judgment of the Court (Grand Chamber) (19 December 2019), Case C-219/17, para 58, upholding the ECB’s ‘exclusive competence to decide whether or not to approve the acquisition of a qualifying holding in a credit institution’ to prevent Silvio Berlusconi from acquiring a qualifying holding in an Italian credit institution because of his conviction for tax fraud.

11  See John Eatwell and Lance Taylor, Global Finance at Risk: The Case for International Regulation (Polity Press 2010), discussing the institutional model for a World Financial Authority to control systemic risk; Rosa Lastra, International Monetary and Financial Law (2nd edn, Oxford University Press 2015), discussing the legal norms that bind international financial regulation; Kern Alexander, Rahul Dhumale, and John Eatwell, Global Governance of Financial Systems: International Regulation of Systemic Risk (Oxford University Press 2006), arguing for an international framework treaty to delegate authority to international standard setting bodies to develop binding norms of international financial regulation to be implemented flexibly by states.

12  Viral V Acharya, ‘Is the International Convergence of Capital Adequacy Regulation Desirable?’ (2003) 58 The Journal of Finance 2745.

13  Ibid, 2780.

14  Sumit Agarwal et al, ‘Inconsistent Regulators: Evidence from Banking’ (2014) 129 The Quarterly Journal of Economics 889.

15  Ibid.

16  See Eddy Wymeersch, ‘The Single Supervisory Mechanism: Institutional Aspects’ in Danny Busch and Guido Ferrarini (eds), European Banking Union (Oxford University Press 2015) 93–4, citing an extensive academic and policy-based literature considering the need to adopt a European institutional framework for the supervision of financial markets.

17  See Asli Demirguc-Kunt and Harry Huizenga, ‘Market Discipline and Financial Safety Net Design’, (Policy Research Working Paper No 2183, World Bank 1999) 14, available online at <http://documents.worldbank.org/curated/en/958561468764415831/pdf/multi-page.pdf> accessed 7 December 2018, arguing for prudential regulation, supervision and resolution and lender of last resort as main elements of financial safety net. See also Christos Gortsos, Fundamentals of Public International Financial Law (Nomos 2012) 90–104, arguing for these elements as well and discussing the absence of an effective regime for Emergency Liquidity Assistance by the European Central Bank in the Banking Union. See also Jens-Hinrich Binder and Christos Gortsos, The European Banking Union—A Compendium (Nomos 2016) 2–5.

18  See Giovanni Bassani, ‘The Legal Framework Applicable to the Single Supervisory Mechanism’ – Tapestry or Patchwork’ (Wolters Kluwer, 2019) 43-44. See also Eilis Ferran, ‘European Banking Union: Imperfect, But It Can Work’ in Danny Busch and Guido Ferrarini (eds), European Banking Union (Oxford University Press 2015) 56–90, 60–1. Ferran observes that to achieve the Banking Union’s objectives of enhancing the internal market for banking and financial services while maintaining banking stability, it will be necessary to overcome ‘the legal complexities’ in building an institutional structure of banking regulation, supervision, and resolution that ‘touch the boundaries of what is permissible under EU law without a Treaty change’: ibid 86.

19  See Wymeersch, ‘SSM’ (n 16) 93–117, 111–12.

20  See Guido Ferrarini and Fabio Recine, ‘The Single Rulebook and the SSM: Should the ECB Have More Say in Prudential Rulemaking?’ in Danny Busch and Guido Ferrarini (eds), European Banking Union (Oxford University Press 2015) 118–54, 143–51. See also, Christos Gortsos, The Single Supervisory Mechanism (SSM) (Nomiki Bibliothiki 2015), provides comprehensive legal analysis of the SSM Framework.

21  SSM Regulation (n 6), arts 4(1)(a), (c) and 6(4). See for the list of significant and less significant entities as of 1 September 2018: European Central Bank, ‘List of supervised entities’ (ECB 2018), available online at <www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.list_of_supervised_entities_201810.en.pdf> accessed 7 December 2018.

22  See SSM Regulation (n 6), art 6(5)(b).

23  Ibid, art 6(4).

24  Judgment of the Court (First Chamber) (8 May 2019), Landeskreditbank Baden-Wurtttemberg Forderbank v European Central Bank, Case C-450/17P, upholding the General Court’s finding that ‘the Council conferred on the ECB exclusive competence, the decentralised implementation of which by the national authorities is enabled by Article 6 of that [SSM] regulation, under the SSM and under the control of the ECB, in relation to less significant credit institutions’.

25  Ibid, art 1.

26  The so-called ‘Single Rulebook’ in banking refers to the EU directives, regulations, technical standards, and guidance that apply to the 28 EU states’ domestic banking regulatory regimes. The EU legislation includes the Capital Requirements Directive IV, Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms; Regulation (EU) 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) 648/2012 [2013] OJ L176/1 (CRR); Directive 2014/59 EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directives 77/91/EEC and 82/891/EC, Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/35/EC; and Directive 2014/59, OJ L173/190 (BRRD); Directive 2014/49/EU (deposit guarantees). The CRD IV and CRR implement the Basel Capital Accord (now Basel III & IV) into EU law, while the BRRD provides a minimum harmonization framework requiring Member States to adopt recovery and resolution laws for banks and certain investment firms.

27  Regulation (EU) 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC [2010] OJ L331/12, arts 1–2, 10, and 14–16. The Single Rulebook is analysed in depth in this volume. See Guido Ferrarini and Fabio Recine, ‘The Single Rulebook and the SSM: Regulatory Polycentrism vs Supervisory Centralization’ in Danny Busch and Guido Ferrarini (eds), The European Banking Union ( 2nd edn, Oxford University Press 2019), 5.01–5.03..

28  SSM Regulation (n 5), art 7(1) and (2)(a)–(c), providing the legal requirements for ECB co-operation with national competent authorities that enter ‘close co-operation’ with the SSM, including rules that apply directly to banks established in participating countries.

29  Ibid, Recital 14 and art 3(6). The SSM Regulation reserves the term ‘NCA’ for authorities participating in the SSM. Non-SSM authorities are ‘competent authorities’ on equal footing with the ECB.

30  Federal Ministry of Finance, ‘The Single Supervisory Mechanism: Lessons learned after the first three years’ (German Federal Ministry of Finance’s Monthly Report, Bundesfinanzministerium January 2018), available online at <https://www.bundesfinanzministerium.de/Content/EN/Downloads/2018-01-26-SSM.pdf> accessed 12 August 2019.

31  Ibid.

32  SSM Regulation (n 6), art 4(1).

33  Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87 EC and repealing Directives 2006/48/EC and 2006/49/EC [2013] OJ L176/338 (‘CRD IV’); Regulation (EU) 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms [2013] OJ L176/1 (‘CRR’).

34  SSM Regulation (n 6), art 4(3).

35  Ibid, art 4(1)–(3), especially art 4(1)(d) and (e).

36  Ibid, art 4(1)(g) and (h) mention ‘mixed financial holding companies’ and ‘financial conglomerate’, respectively, over which the ECB has certain supervisory powers.

37  Federal Ministry of Finance (n 30).

38  Oliver Wyman, ‘Cross-border Bank M&A? Europe Is Not Ready’ (Oliver Wyman Insights, 8 November 2017), available online at <www.oliverwyman.com/our-expertise/insights/2017/nov/cross-border-bank-m-and-a-europe-is-not-ready.html> accessed 14 November 2018.

39  Ibid.

40  Martin Arnold, Patrick Jenkins, and Laura Noonan, ‘Banking M&A: the quest to create a European champion’ Financial Times (London, 11 July 2018), available online at <www.ft.com/content/cd640614-78a1-11e8-8e67-1e1a0846c475> accessed 14 November 2018. See also Commission, ‘Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the regions, Completing the Capital Markets Union by 2019—time to accelerate delivery’ COM(2018) 114 final, 5–6.

41  Commission, ‘Completing the Capital Markets Union by 2019’ (n 40), 5–6.

42  Commission, ‘Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, Action Plan on Building Capital Markets Union’ COM(2015) 468 final, providing short overview of CMU initiatives.

43  See Commission, ‘Proposal for a Directive of the Parliament and of the Council on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU’ COM(2016) 723 final, Parliament and Council will decide in early 2019. See European Commission; ‘Proposal for a Council Directive on a Common Corporate Tax Base’ COM(2016) 685 final, still in the legislative process.

44  SSM Regulation (n 6), art 26 (‘planning and execution of the tasks conferred on the ECB shall be fully undertaken by an internal body composed of its Chair and Vice Chair’).

45  Ibid, art 2(1), defining ‘participating Member State’ as ‘a Member State whose currency is the euro or a Member State whose currency is not the euro which has established a close co-operation in accordance with Article 7’ [Close co-operation with the competent authorities of participating Member States whose currency is not the euro].

46  Ibid, art 25. The monetary policy and prudential supervision tasks of the ECB are separated.

47  See Kern Alexander, ‘European Banking Union: A Legal and Institutional Analysis of the Single Supervisory Mechanism and Single Resolution Mechanism’, 40:2 (April 2015) (Sweet & Maxwell, Andover, UK) 154–87, 170–71

48  Federal Ministry of Finance (n 30). See also Fernando Restoy, ‘European banking sector: situation and challenges’ (Speech for the APIE Association of Economics Journalists, Bank for International Settlements 18 Oct 2018), available online at <https://www.bis.org/review/r160630b.pdf> accessed 10 August 2019. See also Riksbank, ‘Consequences for financial stability of Nordea’s relocation to Finland’ (Financial Stability Report 2018:1, Sweden’s central bank Riksbank 2018) 37–8, available online at <https://www.riksbank.se/globalassets/media/rapporter/fsr/engelska/2018/fsr-180523/consequences-for-financial-stability-of-nordeas-relocation-to-finland-article-in-the-financial-stability-report-2018_1.pdf> accessed 7 December 2018, discussing SSM’s effectiveness in the context of Nordea’s relocation of its parent office from Sweden to Finland and the consequences for applying high standards for prudential supervision.

49  Consolidated Version of the Treaty on the Functioning of the European Union 2008 OJ C115/47 (‘TFEU’), art 127(1) (stating ‘the primary objective of the European System of Central Banks … shall be to maintain price stability’).

50  Federal Ministry of Finance (n 30).

51  Commission, ‘Commission Staff Working Document—Report from the Commission to the European Parliament and the Council on the Single Supervisory Mechanism established pursuant to Regulation (EU) No 1024/13’ COM(2017) 591 final, 54.

52  Basel Committee on Banking Supervision, Basel III: finalising post-crisis reforms (December 2017), 1–2.

53  Commission, ‘Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements and amending Regulation (EU) No 648/2012’ COM(2016) 0850 final. See also Commission, ‘Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures’ COM(2016) 0854 final 3. See also, Carla Stamegna, ‘Amending capital requirements: The “CRD V Package” ’ (EU Legislation in Progress briefing, European Parliament September 2018), available online at <http://www.europarl.europa.eu/RegData/etudes/BRIE/2017/599385/EPRS_BRI(2017)599385_EN.pdf> accessed 5 December 2018.

54  COM(2016) 0854 final (n 51) 3; COM draft Regulation (2016) 0850 final (n 49) 5.

55  COM draft Regulation (2016) 0850 final (n 51) 20–1, 209–28.

56  COM draft Regulation (2016) 0850 final (n 51) 31–2, 142.

57  COM draft Regulation (2016) 0850 final (n 51) 9–10, 15–19. For the exact calculation of own funds for trading book and market risk, see 127–33 and 134–66 for the standardized approach, 167–93 for the internal model approach, and 193–208 for the simplified internal approach. The simplified standardized approach remains unchanged, while the simplified internal approach will not be permitted to be used after the proposed Regulation comes into effect. See p 17.

58  COM(2016) 0854 final (n 51) 10–11, 27–31.

59  COM(2016) 0854 final (n 51) 12–13, 25–6.

60  COM(2016) 0854 final (n 51) 3.

61  COM(2016) 0854 final (n 51) 22, 268–71.

62  COM(2016) 0854 final (n 51) 15, 69–71.

63  COM(2016) 0854 final (n 51) 10, 18–20.

64  Ibid.

65  Stamegna (n 53), 10. See also COM(2016) 0854 final (n 51) 36, 196–7.

66  European Commission, ‘Report of the High-level Expert Group on financial supervision in the EU’ (Chaired by Jacques de Larosière, European Commission 25 February 2009) (‘De Larosière report’) paras 194–214, available online at <http://ec.europa.eu/economy_finance/publications/pages/publication14527_en.pdf> accessed 6 December 2018.

67  The ESFS entered into force on 1 January 2011 and applies to all EU Member States requiring their participation in and co-ordination with other EU states in adopting regulatory and technical implementing standards in the three European Supervisory Authorities. In principle, Member States retained micro-prudential supervisory powers but are required to co-ordinate their adoption of regulatory technical standards with other EU states within the three ESA bodies along sectoral lines—banking, securities and insurance. Kern Alexander, ‘Reforming European Financial Supervision: Adapting EU Institutions to Market Structures’ (2011) 12 Journal of the Academy of European Law 229.

68  Regulation (EU) 1093/2010 (n 27); Regulation (EU) 1094/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/79/EC [2010] OJ L331/48; Regulation (EU) 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC [2010] OJ L331/84.

69  Regulation (EU) 1092/2010 on European Union macroprudential oversight of the financial system and establishing a European Systemic Risk Board [2010] OJ L331/1. In connection to the functioning of the ESRB, specific tasks were conferred on the ECB concerning macroprudential oversight of the financial system. See Council Regulation (EU) 1096/2010 conferring specific tasks upon the ECB concerning the functioning of the European Systemic Risk Board [2010] OJ L331/162. See discussion Eilis Ferran and Kern Alexander, ‘Can Soft Law Bodies be Effective? Soft Systemic Risk Oversight Bodies and the Special Case of the European Systemic Risk Board’ (2010) 6 European Law Review 751.

70  See Jean-Victor Louis, ‘The implementation of the Larosiere Report: a progress report’ in Mario Giovanoli and Diego Devos (eds), International Monetary and Financial Law: the Global Crisis (Oxford University Press 2010) 154.

71  Regulation (EU) 1093/2010 (n 27), art 8, para 1 providing an exhaustive list (without prejudice to art 9) of the tasks conferred upon the EBA. These regulatory and supervisory standards and practices are further specified in arts 10–16 and 34.

72  Regulation (EU) 1093/2010 (n 27), arts 10–21, 29, and 34.

73  See ibid, art 8 para 1, containing an exhaustive list of the tasks conferred upon the EBA, while para 2 features an exhaustive list of all regulatory and other powers conferred on it in order to fulfil its tasks.

74  Regulation (EU) 1093/2010 (n 27), art 2(2)(f), amended by Regulation (EU) 1022/2013 (n 6), art 1(2).

75  SSM Regulation (n 5), art 3(1) first subpara.

76  Regulation (EU) 1093/2010 (n 27), art 3(2).

77  Commission, ‘Commission Staff Working Document, Report on SSM’ (n 51).

78  SSM Regulation (n 6), Recital 32.

79  Commission, ‘Commission Staff Working Document, Report on SSM’ (n 51), 50.

80  Commission, ‘Commission Staff Working Document, Report on SSM’ (n 51), 50–1.

81  Ibid, 51.

82  Ibid, 51.

83  Commission, ‘Commission Staff Working Document, Report on SSM’ (n 51).

84  Regulation (EU) 1093/2010 (n 27).

85  Commission, ‘Commission Staff Working Document, Report on SSM’ (n 51), 51.

86  European Banking Authority, ‘Opinion of the European Banking Authority on the public consultation on the operation of the European Supervisory Authorities’ (EBA/Op/2017/08, EBA 31 May 2017), available online at <www.eba.europa.eu/documents/10180/1861443/EBA+Opinion+on+ESAs+review+%28EBA-Op-2017-08%29.pdf> accessed 7 December 2018.

87  Ibid, 3.

88  European Commission, ‘Feedback Statement on the Public Consultation on the Operations of the ESAs having taken place 21 March to 16 May 2017’ (consultation document, 20 June 2017) 16, available online at <https://ec.europa.eu/info/sites/info/files/2017-esas-operations-summary-of-responses_en.pdf> accessed 5 December 2018.

89  Commission, ‘Commission Staff Working Document, Report on SSM’ (n 51), 52.

90  Ibid, 51–2.

91  European Central Bank, ‘ECB contribution to the European Commission’s consultation on the operations of the European Supervisory Authorities’ (consultation on the operations of the European Supervisory Authorities, ECB 2017), available online at <https://www.ecb.europa.eu/pub/pdf/other/ecb.consultation_on_operations_of_ESA_201707.en.pdf?293cf1575920e5a08e0b54165f961e62> accessed 5 December 2018.

92  Ibid, 2.

93  ECB/SSM and other ESAs: for EBA see Commission, ‘Commission Staff Working Document, Report on SSM’ (n 51), 15. See also Commission, ‘Proposal for a Regulation of the European Parliament and of the Council Amending Regulation (EU) 1093/2010 establishing a European Supervisory Authority (European Banking Authority); Regulation (EU) 1094/2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority); Regulation (EU) 1095/2010 establishing a European Supervisory Authority (European Securities and Markets Authority); Regulation (EU) 345/2013 on European venture capital funds; Regulation (EU) 346/2013 on European social entrepreneurship funds; Regulation (EU) 600/2014 on markets in financial instruments; Regulation (EU) 2015/760 on European long-term investment funds; Regulation (EU) 2016/1011 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds; and Regulation (EU) 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market’ COM(2017) 536 final, 13, 23.

94  European Commission, Feedback Statement 16: See Commission, ‘Proposal for a Regulation of the European Parliament and of the Council (to extend powers of the ESAs)’ (n 93), 23–4. See also Commission, ‘Communication from the Commission to the European Parliament, the Council, the European Central Bank, The European Economic and Social Committee and the Committee of the Regions reinforcing integrated supervision to strengthen Capital Markets Union and financial integration in a changing environment’ COM(2017) 542 final.

95  ECB/SSM, (n 91), 16.

96  See Commission, ‘Proposal for a Regulation of the European Parliament and of the Council (to extend powers of the ESAs)’ (n 93).

97  Ibid, 23.

98  Ibid, 24.

99  Commission, ‘Commission Staff Working Document, Report on SSM’ (n 51), 52.

100  Ibid, 44.

101  Commission, ‘Commission Staff Working Document, Report on SSM’ (n 51), 52–3.

102  Federal Ministry of Finance (n 30).

103  European Court of Auditors, ‘Single Supervisory Mechanism—Good start but further improvements needed’ (ECA special report No 29/2016, 2016), available online at <https://www.eca.europa.eu/Lists/ECADocuments/SR16_29/SR_SSM_EN.pdf> accessed 5 December 2018.

104  Commission, ‘Commission Staff Working Document, Report on SSM’ (n 51), 9–10.

105  Ibid, 10.

106  See Miroslava Scholten, The Political Accountability of EU and US Independent Regulatory Agencies (Brill Nijhoff 2014); Edoardo Chiti, ‘European Agencies’ Rulemaking: Powers, Procedures and Assessment’ (2013) 19 European Law Journal 93; Madalina Busuioc, ‘Rule-Making by the European Financial Supervisory Authorities: Walking a Tight Rope’ (2012) 19 European Law Journal 111; Merijn Chamon, ‘EU Agencies: Between Meroni and Romano or The Devil and the Deep Blue Sea’ (2011) 48 Common Market Law Review 1055.

107  See Charles Goodhart, ‘Bank Resolution in Comparative Perspective: What Lessons for Europe?’ in Charles Goodhart et al (eds), Central Banking at a Crossroads: Europe and Beyond (Anthem Press 2014).

108  Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) 1093/2010 and 648/2012 of the European Parliament and of the Council [2014] OJ L173/190 (‘BRRD’), 190–348.

109  Ibid, art 37(4). Resolution authorities have discretion whether or not to use the resolution tools, or in what combination to use them, including use of the bail-in tool to impose losses on bank liabilities, such as bondholders, when an institution is experiencing financial difficulties.

110  Minimum Requirement for own Funds and Eligible Liabilities (MREL) in the BRRD and total loss absorbing capacity (TLAC) from Basel III. See European Banking Authority, ‘Regulatory Technical Standards on minimum requirement for own funds and eligible liabilities (MREL)’. See also Basel Committee on Banking Supervision, ‘Standard: TLAC holdings: Amendments to the Basel III standard on the definition of capital’ (2016).

111  Italian Consolidated Banking Law, art 72(6). However, the approval of the bank’s capital structure remains with the shareholder general meeting.

112  See s 46(1) of the German Banking Act.

113  Articles L613-18 and L613-22 of the Monetary and Financial Code.

114  Article 23quater of the Swiss Banking Act.

115  Article 29 s 3 of the Swiss Banking Act.

116  Sections 3–5 of the Act on Guarantee Schemes for Banks and Public Administration etc, of Financial Institutions (Guarantee Schemes Act) of 6 December 1996 (as amended per 1 July 2004). See also art L613-25 of the Monetary and Financial Code.

117  Article L613-25 of the Monetary and Financial Code.

118  Commission, ‘Proposal for a Regulation of the European Parliament and of the Council establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single resolution Mechanism and a Single Bank Resolution Fund and amending Regulation (EU) 1093/2010 of the European Parliament and of the Council’ COM(2013) 520 (‘SRM Proposal’).

119  See SSM Regulation (n 7), Recital 85; and European Commission, Communication from the Commission to the European Parliament and the Council, ‘A Roadmap towards a Banking Union, COM(2012) 510 final, 12.09.2012, 9; and European Council, Conclusions (13–14 December 2012), Euco 205/12, para 11, stating ‘where bank supervision is effectively moved to a single supervisory mechanism, a single resolution mechanism will be required, with the necessary powers to ensure that any bank in participating Member States can be resolved with the appropriate tools’: available online at <http://www.consilium.europa.eu.eu/uedocs/cms_data/docs/pressdata/en/ec/134353.pdf> accessed 14 November 2014.

120  SRM Regulation (n 9), Recital 12.

121  SRM Regulation (n 9), arts 2 and 6(1)–(7).

122  SRM Regulation (n 8), art 27 (‘Bail-in tool’).

123  SSM Regulation, art 4(h)(1)

124  SRM Regulation (n 8), Chap 1 ‘Resolution Planning’, art 8 (‘Resolution plans drawn up by the Board’).

125  SRM Regulation (n 8), Recital 55.

126  SRM Regulation (n 8), Chap 2 ‘Single Resolution Fund’, arts 67–79.

127  On 21 October 2014, the Commission adopted a delegated act and a draft proposal for a Council implementing act to calculate the contributions of banks to the national resolution funds and to the Single Resolution Fund (SRF), respectively. The delegated act determines how much individual credit institutions will have to pay each year to their respective resolution funds according to the bank’s size and risk profile by setting out in detail: (i) the fixed part of the contribution, which is based on the institution’s liabilities (excluding own funds and covered deposits), as the starting point for determining the contribution; and (ii) how the basic contribution is adjusted in accordance with the risk posed by each institution. There is a special lump-sum regime for small banks, as they are less likely to need support from resolution funds. For example, banks representing 1% of the total assets would pay 0.3% of the total contributions by institutions in the euro area.

128  The SRF IGA provides the methodology to the specificities of a unified system of contributions pooled in the SRF on the basis of a European target level. According to a Commission working document, French banks would contribute around €17bn (30%) and German bank €15bn (27%) of the €55bn target fund over eight years. French banks will pay 68% more into the SRF than under the BRRD, German banks and Spanish banks pay 9% less and 44% less respectively. The Commission working document acknowledges that the possibility of introducing a mechanism to limit these deviations is offered by Recital 114 and art 70(2)(b) of the SRM Regulation (n 8), which provide that no distortions shall be created between banking sector structures of the Member States.

129  Council, Legislative Acts and other Instruments, ‘Agreement on the transfer and mutualization of contributions to the Single Resolution Fund, 8457/14, LIMITE, EF 121, ECOFIN 342, art 3, Brussels, 14 May 2014.

130  SRF bridge financing arrangements became operational in 2016 and involve a transition from national resolution fund sources, paid for by bank levies, or from the European Stability Mechanism (ESM) and permit temporary transfers between national compartments of the SRF will also be possible.

131  Meroni & Co. Industrie Metallurgiche, SpA v High Authority of the European Coal and Steel Community [1958] ECR 133, 152 (C-9/56). See discussion of Meroni doctrine in Stefan Griller and Andreas Orator, ‘Everything Under Control? “The Way Forward” for European Agencies in the Footsteps of the Meroni Doctrine’ (2010) 35 European Law Review 3. See also Merijn Chamon, ‘EU Agencies: Does the Meroni Doctrine Make Sense?’ (2010) 17 Maastricht Journal European and Comparative Law 281.

132  UK v Parliament and Council ECLI:EU:C:2014:18 (Case C-270/12); cf Germany v Parliament and Council [2000] ECR I-8419 (Case C-376/98), however holding that the Directive on advertising and sponsorship of tobacco products did not have as its genuine objective the establishment and functioning of the internal market, but instead public health considerations.

133  See Meroni & Co. Industrie Metallurgiche, SpA v High Authority of the European Coal and Steel Community [1958] ECR 133, 152 (Case C-9/56); United Kingdom v European Parliament and Council [2005] ECR I-10553, paras 41–50 (Case C-66/04) (Smoke Flavourings); and United Kingdom v European Parliament and Council [2006] ECR I-3771, paras 42–5 (Case C-217/04) (ENISA).

134  The Commission’s powers as a resolution authority do not include the power to require a Member State to provide extraordinary public support to a bank: SRM Regulation (n 8), art 6(4).

135  SRM Regulation (n 8), art 14(2)(a)–(e). Specifically art 14(2)(b) provides that resolution objectives include avoiding ‘significant adverse effects on financial stability, in particular by preventing contagion, including to market infrastructures, and by maintaining market discipline.’ The wide range factors relied on by the SRB in determining whether a resolution is in the public interest grants the SRB broad discretion in deciding whether to put a bank into resolution or not: SRM Regulation (n 8), art 18(5).

136  See Garry J Schinasi, Safeguarding Financial Stability: Theory and Practice (International Monetary Fund 2005) 81 (citing the Group of Ten 2001 report stating ‘[s]ystemic financial risk is the risk that an event will trigger a loss of economic value or confidence in, and attendant increases in uncertainty about, a substantial portion of the financial system that is serious enough to quite probably have significant adverse effects on the real economy.’ Group of Ten, ‘Report on Consolidation in the Financial Sector’ (International Monetary Fund 2001), 126–7, available online at <www.imf.org/external/np/g10/2001/01/Eng/index.htm> accessed 6 December 2018. G10, 2001 Report, 126–7).

137  SRM Regulation (n 9), arts 14 and 27(5)(a)–(d).

138  Commission, ‘Commission Staff Working Document, Report on SSM’ (n 51), 53–4.

139  BRRD Directive 2014/59/EU (n 108), Title III.

140  See Banco de Portugal, ‘White Paper on the regulation and supervision of the financial system’ (white paper, Banco de Portugal 2016) Pt VI, available online at <www.bportugal.pt/sites/default/files/anexos/pdf-boletim/livro_branco_web_en.pdf> accessed 6 December 2018.

141  BRRD Directive 2014/59/EU (n 100), art 17(5). Under art 17(5) of the BRRD the resolution authority is empowered to conduct a resolvability assessment to identify whether or not there are substantial impediments to the implementation of a credible and feasible resolution plan.

142  In considering whether to order a bank to remove such organizational impediments, arts 15 and 16 of the BRRD and SRM Regulation (n 9) provide that the resolution authority must consult the competent supervisory authority regarding the resolution authority’s determination of whether or not there are substantial impediments to the resolvability of a firm.

143  The European Banking Authority has developed a Guideline on ‘Conditions for Measures to Overcome Obstacles to Resolvability’, for resolution authorities to rely on in considering whether to take measures under art 17(5).

144  SRM Regulation (n 8), art 10(11).

145  Ibid: ‘Where applicable, the national resolution authorities shall directly take the measures referred to in points (a) to (j) of the first subparagraph’.

146  BRRD Directive 2014/59/EU (n 97), art 17(5), which provides a non-exhaustive range of powers for authorities to remove firm impediments to resolvability in advance of failure that may be used if measures proposed by firms are insufficient to ensure resolvability.

147  SSM Regulation (n 5), arts 4 and 6(1).

148  Ibid, art 6(7)(a)–(c). See also art 26(8) (SB shall adopt ‘draft decisions’ ‘to be transmitted ( … ) to the national competent authorities of the Member States concerned’).

149  Ibid, art 6(5)(b): ‘when necessary to ensure consistent application of high supervisory standards, the ECB may at any time on its own initiative after consulting with national competent authorities or upon request by a national competent authority, decide to exercise directly itself all the relevant powers for one or more credit institutions’.

150  Federal Ministry of Finance (n 30).

151  Stamegna (n 53).

152  See Deutsche Bundesbank, ‘Launch of the Banking Union: the Single Supervisory Mechanism in Europe’ (October 2014) Monthly Report 43, available online at <www.bundesbank.de/resource/blob/622796/9987dfa1d6cb77495aec5ac4cf43ff8c/mL/2014-10-banking-union-data.pdf> accessed 6 December 2018. The criteria used to define a bank as significant are: total value of assets exceeding €30 billion, whether it is one of the top three largest banks in its home Member State; its importance to the economy of its home state or the EU as a whole; the extent of its cross-border activities; and whether it has requested or received direct public financial assistance from the European Stability Mechanism (ESM) or the European Financial Stability Facility (ESFS); SSM Regulation (n 5), art 6(4)(i)–(iii).

153  SSM Regulation (n 6), art 4(1): ‘in relation to all credit institutions established in the participating Member States’.

154  SSM Regulation (n 6), art 33(2).

155  See R Smits, ‘Competences and alignment in an emerging future After L-Bank: how the Eurosystem and the Single Supervisory Mechanism may develop’, (Oct 2017), ADEMU Working Paper Series, WP 2017/077, 1–40, 3–6, providing detailed analysis of the L-Bank case as it was decided by ABoR and the European General Court.

156  See Case T-122/15 Landeskreditbank Baden-Württemberg—Förderbank v European Central Bank (ECB) [2017], 4, see also the arguments made on pages 8–10. As of 2019, the CRD V directive, which amends CRD IV, expicitely excludes The ‘Landeskreditbank Baden-Württemberg—Förderbank’ from the scope of the directive in art 2(5). Various other European banking institutions are also listed in art 2, among them similar German ‘undertakings which are recognised under the “Wohnungsgemeinnützigkeitsgesetz” as bodies of State housing policy and are not mainly engaged in banking transactions, and undertakings recognised under that law as non-profit housing undertakings[.]’ See art 2(5) of Directive 2019/878 of the European Parliament and of the Coucil of 20 May 2019 amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures, and powers and capital conservation measures [2019] OJ L150/253 (CRD V).

157  See Regulation (EU) 468/2014 of the European Central Bank of 16 April 2014 establishing the framework for co-operation within the Single Supervisory Mechanism between the European Central Bank national competent authorities and with national designated authorities (SSM Framework Regulation) [2014] OJ L141/1, art 70. See also Smits (n 155), 5–7.

158  See Regulation (EU) 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions [2013] OJ L287/63, art 5(b), Recitals 12, and 83: ‘supervision of the highest quality, unfettered by other, non-prudential considerations’.

159  Ibid, paras 64 and 65.

160  Case C-450/17 P Landeskreditbank Baden-Württemberg v ECB [2019] paras 108–15.

161  Regulation (EU) 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions [2013] OJ L287/63, art 6(7)(b).

162  Ibid, art 9(1).

163  See Regulation (EU) 468/2014 of the European Central Bank of 16 April 2014 establishing the framework for co-operation within the Single Supervisory Mechanism between the European Central Bank national competent authorities and with national designated authorities (SSM Framework Regulation) [2014] OJ L141/1, art 9(2).

164  Ibid, art 10(c).

165  Stefan Iwankowski and Miguel Guthausen, ‘Two years of the SSM: a lot done, a lot more to do’ (BaFin Division for SSM/SB Coordination 17 October 2016), available online at <https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Fachartikel/2016/fa_bj_1610_EinheitlicherAufsichtsmechanismus_en.html;jsessionid=733E809CA85860E7182FF5DD86AA1C8D.2_cid363> accessed 16 November 2018.

166  Ibid.

167  Commission, ‘Commission Staff Working Document, Report on SSM’ (n 50), 30.

168  Frédéric Visnovsky, ‘Le Mécanisme de Supervision Unique Deux Ans Après’ (Séminaire de Recherche Sciences-Po/ Banque de France, November 2016), available online at <https://acpr.banque-france.fr/sites/default/files/medias/documents/20161123_intervention-visnovsky-scpo_msu.pdf> accessed 16 November 2018.

169  Stefan Iwankowski and Miguel Guthausen, ‘Two years of the SSM: a lot done, a lot more to do’ (BaFin Division for SSM/SB Coodrination 17 October 2016), available online at <https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Fachartikel/2016/fa_bj_1610_EinheitlicherAufsichtsmechanismus_en.html;jsessionid=733E809CA85860E7182FF5DD86AA1C8D.2_cid363> accessed 16 November 2018.

170  Ibid.

171  SSM Regulation (n 6), art 4.

172  Commission, ‘Commission Staff Working Document, Report on SSM’ (n 51), 24.

173  Ibid, art 8(1).

174  Ibid, art 8(2).

175  SSM Framework Regulation, art 14(2) provides that ‘the NCA of the participating Member State where the branch is established shall exercise the powers of the host MS’.

176  Ibid, art 15.

177  Ibid, art 16(1).

178  Ibid, art 17(1).

179  See Richard Milne, ‘Danske Bank plans culture revamp after money laundering scandal’ Financial Times (London, 1 November 2018), available online at <https://www.ft.com/content/e0016170-dda7-11e8-9f04-38d397e6661c> accessed 11 December 2018.

180  See Olaf Storbeck, ‘Deutche Bank Reports Suscipious Tax Transactions’ Financial Times (London, 9 December 2018), available online at <https://www.ft.com/content/4df2ba2a-fba9-11e8-aebf-99e208d3e521> accessed 11 December 2018.

181  Florin Coman-Kund and Fabian Amtenbrink, ‘On the Scope and Limits of the Application of National Law by the European Central Bank Within the Single Supervisory Mechanism’ (2018) 33 Banking & Finance Law Review 133.

182  Ibid, 170.

183  Wymeersch, ‘SSM’ (n 16), 106–07.

184  Ibid, 107.

185  Coman-Kund and Amtenbrink ‘Scope’ (n 176), 171.

186  See Petra Senkovic, ‘Additional clarification regarding the ECB’s competence to exercise supervisory powers granted under national law’ (ECB letters to banks SSM/2017/0140, European Central Bank 31 March 2017), available online at <www.bankingsupervision.europa.eu/banking/letterstobanks/shared/pdf/2017/Letter_to_SI_Entry_point_information_letter.pdf?abdf436e51b6ba34d4c53334f0197612> accessed 6 December 2018.

187  SSM Framework Regulation, art 95.

188  Senkovic (n 188), 2.

189  Article 9(1) also provides that the ECB can instruct national authorities to use their only ‘where [the SSM Regulation] does not confer such powers on the ECB.’

190  I thank Eilis Ferran for this observation.

191  Senkovic (n 188).

192  Ibid.

193  European Commission, ‘Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions’ COM(2012) 511 final, Recitals 10 and 44.

194  Marshall v Southampton and South-West Hampshire Area Health Authority ECLI:EU:C:1986:84; [1986] ECR 723 (Case 152/84).

195  See Senkovic (n 188).

196  Ibid.

197  See European Commission, ‘De Larosière report’ (n 52). See also Financial Services Authority, ‘The Turner Review—a regulatory response to the global banking crisis’ (UK Financial Services Authority March 2009), available online at <www.fsa.gov.uk/pubs/other/turner_review.pdf> accessed 6 December 2018.

198  See Financial Policy Committee, ‘Financial Stability Report—June 2012’ (Financial Policy Committee, Bank of England 2012).

199  Ibid. Other macroprudential tools include leverage ratios could be used to limit the amount of leverage relative to the value of the bank’s assets. Forward-looking loss provisions: Financial institutions can be required to set aside provisions against potential future losses on their lending. Collateral requirements: Lending could be limited by imposing higher collateral restrictions, for example if growth in lending appears to be unsustainable. An example is a loan to value requirement, which would limit the size of a loan relative to the value of the asset. Similarly, ‘haircuts’ on repurchase agreements would limit the amount of cash that can be lent as a proportion of the market value of a set of securities. Information disclosure: Greater transparency could help markets work better. For example, in times of crisis, more information about different institutions’ risk exposure could increase the flow of credit as uncertainty is reduced.

200  SSM Regulation, art 5.

201  Ibid, art 5(1).

202  Ibid, art 5(2).

203  Ibid, art 5(5).

204  Ibid, art 5(4).

205  CRR, art 458. This article is entitled ‘Macroprudential or systemic risk identified at the level of a Member State’ and states: ‘2. Where the authority determined in accordance with paragraph 1 identifies changes in the intensity of macroprudential or systemic risk in the financial system with the potential to have serious negative consequences to the financial system and the real economy in a specific Member State and which that authority considers would better be addressed by means of stricter national measures, it shall notify the European Parliament, the Council, the Commission, the ESRB and EBA of that fact and submit relevant quantitative or qualitative evidence’.

206  SSM Regulation, art 5(2).

207  CRD, art 136(1).

208  CRR, art 458(1) and (2).

209  CRR, art 458(4).

210  Ibid.

211  Ibid, art 5(5).

212  Ibid, art 5(4).

213  SSM Framework Regulation, art 102 provides that the ECB can exercise macroprudential tasks either in conjunction with the NDA or without the NDA exercising the macroprudential task.

214  Ibid, art 101(1). But note also art 101(2): The macroprudential procedures referred to in art 5(1) and (2) of the SSM Regulation shall not constitute ECB or NCA supervisory procedures within the meaning of this Regulation, without prejudice to art 22 of the SSM Regulation in relation to decisions addressed to individual supervised entities.

215  SSM Framework Regulation, Title 2: Procedural Provisions for the Use of Macro-Prudential Tools, arts 103–5.

216  Ibid, art 104(1).

217  Ibid, art 104(3).

218  SSM Framework Regulation, art 105(1).

219  SSM Framework Regulation, art 105(2).

220  SSM Regulation, art 5(4) states that the ECB shall state its reasons [to object] in writing within five working days.

221  European Commission, ‘Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 1092/2010 on European Union macroprudential oversight of the financial system and establishing a European Systemic Risk Board’ COM(2017) 538 final, available online at <https://ec.europa.eu/info/law/better-regulation/initiatives/com-2017-538_en> accessed 15 June 2018. Also note the ECB’s comment: ‘However, the Commission concluded that an overhaul of the macroprudential toolbox was not needed at the current juncture.’ See European Central Bank, ‘Targeted review of the macroprudential framework’ (Macroprudential Bulletin, European Central Bank 27 April 2018), available online at <www.ecb.europa.eu/pub/macroprudential-bulletin/html/ecb.mpbu201804_03.en.html> accessed 15 June 2018.

222  ‘Credit institution’ is defined as an ‘undertaking whose business is to receive deposits or other repayable funds from the public and to grant credit for its own account’. However, it is pointed out that the concept of ‘repayable funds from the public’ and the concepts of ‘credit’ ‘and ‘deposits’ can be interpreted in different ways, meaning that financial institutions performing similar activities in different Member States may be classified as a ‘credit institution’ in one Member State, but not in another. See Communication From the Commission to the Council and the Commission, ‘Shadow Banking—Addressing New Sources of Risk in the Financial Sector’: COM(2013) 614 final.

223  CRR, art 4(1)(1). Similarly, a ‘credit institution’ subject to SSM jurisdiction for carrying on activities governed by EU prudential banking law is not subject to SSM jurisdiction for activities not subject to EU prudential banking law, such as brokering and dealing securities or the marketing and sale of retail financial products.

224  SSM Regulation, art 5.

225  Proposal for a Regulation of the European Parliament and of the Council on the prudential requirements of investment firms and amending Regulation (EU) 575/2013 (EU) 600/2014 and (EU) 1093/2010, Brussels 20.12.2017, COM(2017) 790 final, 3–4.

226  See discussion 2.25ff.

227  Commission, ‘Proposal COM(2016) 0854 final’.

228  COM(2017), p 2, arts 15–20.

229  Commission, ‘Proposal COM(2016) 0854 final’ (n 52).

230  TFEU, art 127(2), fourth indent. See also art 3.1, Statute of the European System of Central Banks.

231  Article 22 of the Statute of ESCB provides: ‘The ECB and national central banks may provide facilities, and the ECB may make regulations, to ensure the efficient and sound clearing and payment systems within the Community and with other countries.’

232  See ECB Opinion of 13 January 2011 (Con/2011/1). The legal authority cited for this proposal was the fourth indent of art 127(2) (fourth indent) of the Treaty and arts 3.1 and 22 of the Statute of the European System of Central Banks and of the European Central Bank.

233  See ECB Opinion of 13 January 2011 (Con/2011/1), p 2.

234  United Kingdom v ECB [2015] 3 CMLR 8, 78 (Case T-496/11).

235  Ibid, 4, 6. See discussion of the case in Guido Ferrarini and David Trasciatti, ‘OTC Derivatives Clearing, Brexit and the CMU’ in Danny Busch and Guido Ferrarini (eds), Capital Markets Union in Europe (Oxford University Press 2018) 140–67.

236  TFEU, art 127(6) provides in relevant part: ‘The Council may, acting unanimously on a proposal from the Commission and after consulting the ECB and after receiving the assent of the European Parliament, confer upon the ECB specific tasks concerning policies relating to the prudential supervision of credit institutions.’

237  See Andreas Dombret, ‘A success story? Reflecting on one year of European banking supervision’ (dinner speech at the conference ‘SSM at 1’ in Frankfurt am Main, Bank for International Settlements 3 February 2016), available online at <www.bis.org/review/r160205a.pdf> accessed 6 December 2018.

238  Ibid. See also Commission report, p 11.

239  See Andreas Dombret, ‘Plan B—where is the banking union heading?’ (Speech at the Banken- und Unternehmensabend at the Deutsche Bundesbank’s Office in Munich, Bundesbank 12 April 2018), available online at <www.bundesbank.de/en/press/speeches/plan-b---where-is-the-banking-union-heading--732316> accessed 6 December 2018.

240  See Bundesbank, available online at <https://www.bundesbank.de/Redaktion/EN/Reden/2015/2015_11_11_dombret.html?https=1> Der Single Supervisory Mechanism—Vom europäischen Aufseher zur europäischen Aufsicht OR Auf die Größe kommt es an—Bankenaufsicht und -regulierung maßgeschneidert?

241  Andreas Kroner and Daniel Schäfer, ‘Central banker Dombret urges EU bank supervisors to merge’ (Handelsblatt Global 10 April 2018), available online at <https://global.handelsblatt.com/finance/dombret-ecb-merge-banking-supervision-eba-909405> accessed 16 November 2018. Expressing the same point of view, Yasmin Osman and Daniel Schäfer, ‘ECB to beef up banking supervision staff’ (Handelsblatt Global 20 October 2015), available online at <https://global.handelsblatt.com/finance/ecb-to-beef-up-banking-supervision-staff-347457> accessed 16 November 2016; Jens Weidmann, ‘From extraordinary to normal—reflections on the future monetary policy toolkit’ (Central Bank Speech 16 November 2018), available online at <https://www.bis.org/review/r181116a.htm> accessed 16 November 2018; Disagreeing Thorsten Beck and Daniel Gros, ‘Monetary Policy and Banking Supervision: Coordination instead of separation’ (No 286 CEPS Policy Brief 12 December 2012), available online at <http://aei.pitt.edu/38914/1/PB286_Beck_%26_Gros_Banking_Supervision_in_ECB[1].pdf> accessed 16 November 2018; Karl Whelan, ‘Should Monetary Policy be separated from Banking Supervision?’ (European Parliament Committee on Economic and Monetary Affairs December 2012), available online at <http://www.europarl.europa.eu/document/activities/cont/201212/20121210ATT57788/20121210ATT57788EN.pdf> accessed 16 November 2018.

242  Frédéric Visnovsky, ‘Le Mécanisme de Supervision Unique Deux Ans Après’ (Séminaire de Recherche Sciences-Po/ Banque de France ‘Les Banques et Système Financier: Quelle Régulation?’, 23 November 2016), available online at <https://acpr.banque-france.fr/sites/default/files/medias/documents/20161123_intervention-visnovsky-scpo_msu.pdf> accessed 7 December 2018.

243  See Restoy (n 48).

244  Salvatore Rossi, ‘The Banking Union in the European integration process’ (Speech, Conference—European Banking Union and bank/firm relationship, CUOA Business School, 7 April 2016) 10.

245  Ibid.

246  See also Riksbank (n 46), 37–8, discussing SSM’s effectiveness in the context of Nordea’s relocation of its parent office from Sweden to Finland and the conseq8ences for applying high standards for prudential supervision.

247  Frank Mehlhorn, ‘Bankgeschäfte in Europa: Wie einheitlich ist die Regulierung und Aufsicht wirklich?’ (Blog, Bankenverband 1 March 2018), available online at <https://bankenverband.de/blog/wie-einheitlich-ist-regulierung-und-aufsicht-wirklich/> accessed 6 December 2018.

248  Commission, ‘Report from the Commission to the European Parliament and the Council on the Single Supervisory Mechanism established pursuant to Regulation (EU) No 1024/2013’ COM(2017) 591 final 42.

249  Ibid.

250  Ibid, 43, subheading C.2.4.

251  Fabio Panetta, ‘Il sistema bancario italiano nel quadro dell’Unione bancaria europea’ (speech at Camera die Deputati, Seminario di aggiornamento professionale, Banca d’Italia, 10 March 2018), available online at <https://www.bancaditalia.it/pubblicazioni/interventi-direttorio/int-dir-2018/Panetta_10_maggio_2018.pdf> accessed 6 December 2018.

252  European Central Bank, ‘Financial integration in Europe’ (European Central Bank May 2017), available online at <www.ecb.europa.eu/pub/pdf/other/ecb.financialintegrationineurope201705.en.pdf> accessed 6 December 2018.

253  Arnold, Jenkins, and Noonan (n 41).

254  Ibid.

255  Wyman (n 39).

256  Arnold, Jenkins, and Noonan (n 41).

257  Ibid.

258  European Central Bank, ‘Too much of a good thing? The need for consolidation in the European banking sector’ (Speech by Danièle Nouy at the VIII Financial Forum in Madrid, European Central Bank 27 September 2017), available online at <www.bankingsupervision.europa.eu/press/speeches/date/2017/html/ssm.sp170927.en.html> accessed 6 December 2018.

259  On the other hand, ‘[t]he banking sector in the United States, for instance, is much smaller. Total assets of the US banking sector account for just 88% of GDP. This, of course, also reflects the fact that capital markets play a much bigger role in financing the US economy.’

260  Wymeersch, ‘SSM’ (n 16) 111–12.

261  Ibid.

262  European Commission (11 October 2017), available online at <https://ec.europa.eu/info/sites/info/files/171011-ssm-review-report-staff-working-document_en.pdf> 5.

263  Arnold, Jenkins, and Noonan (n 41). See also Patrick Jenkins, Rachel Sanderson, and David Keohane ‘UniCredit seeks merger with SocGen’ Financial Times (London, 3 June 2018), available online at <www.ft.com/content/b87ee262-6723-11e8-b6eb-4acfcfb08c11> accessed 6 December 2018. Note that Jean-Pierre Mustier is the chief executive of UniCredit. The FT also reports that Unicredit seeks a merger with SocGen.

264  Arnold, Jenkins, and Noonan (n 41).

265  Unicredit in 2018 issued five-year bonds that required a 8% coupon rate: Robert Smith, ‘UniCredit chief defends steep price for new $3bn bond’ Financial Times (London, 28 November 2018).

266  European Commission, ‘Proposal for a Single Resolution Mechanism for the Banking Union—frequently asked questions’(Memo, European Commission, 10 July 2013).

267  SRM Regulation (n 8), arts 5 and (7).